Have you ever thought: what is a guarantor mortgage and how do they work? A guarantor mortgage is a mortgage secured by a third party. In many cases, this is a parent or a close family member. The guarantor has a legal obligation to repay your lender, if you miss any mortgage payments.
Your home may be repossessed if you do not keep up repayments on your mortgage.
What is a guarantor?
A guarantor will secure the payment of the mortgage and its repayments on behalf of the borrower, usually their child. The child takes out the mortgage, but the parent gives a guarantee that they will make the guarantor mortgage repayments if the child falls behind on their payments.
How does a guarantor mortgage work?
Typically, first-time buyers who cannot secure a mortgage on their own use guarantor mortgages. These mortgages provide lenders with extra assurance of repayment.
Sometimes, lenders use them to approve applicants they might otherwise reject.
- a small deposit
- a low income in relation to the mortgage amount
- a poor credit score or little credit history
How to guarantee a mortgage
There are several ways to secure a guarantor mortgage.
In most cases, the mortgage lender will place a charge against the guarantor’s property. To do this, the guarantor will need to have paid off their mortgage or have sufficient equity in their own property. Having a charge on the guarantor’s property means the guarantor could lose their home. In the event that the child does not pay the guarantor mortgage as agreed.
With other guarantor mortgages, the guarantor can put down cash in a savings account linked to the borrower’s mortgage. Often known as a ‘family offset mortgage’, this arrangement requires keeping the money in the savings account until the mortgage is paid off to a certain proportion. Or until the amount owed on the mortgage falls below a certain proportion of the property’s value.
Parents can also help their child buy a home by buying a property jointly. This means that the lender will take into account both the parent’s and the child’s income when calculating mortgage affordability. With a joint mortgage, both the parent and child’s names are on the mortgage and the property deeds.
A ‘joint borrower sole proprietor (JBSP)’ mortgage works slightly differently. Both the parent and child are named on the mortgage. But, only the child’s name is on the property’s deeds. This means the parent can avoid the stamp duty surcharge payable on second homes.
Who can be a guarantor?
To be a guarantor, the parent or family member usually needs to:
- be a homeowner
- have sufficient equity in their property
- earn a decent income
- have a good credit history
What happens if the borrower misses a repayment on a guarantor mortgage?
If the borrower misses a payment and neither party brings the payments up to date in sufficient time, the lender will ask the guarantor to pay. The lender could ultimately repossess the guarantor’s home or take cash from the savings account linked to the mortgage.
For this reason, it’s important that anyone considering being a guarantor take independent legal advice before going ahead. Some lenders will insist on this.
In the worst-case scenario, guarantor repossessions occur, usually after exploring other options. You should always speak to your lender if you fall into difficulty with your mortgage.
Find your mortgage
Want to explore your guarantor mortgage options and find the best deal for you? We can connect you with our approved mortgage adviser, whether this is to discuss adding someone to the mortgage or exploring various other options.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
Last Updated: January 9th, 2024
