What is a guarantor mortgage and how does it work?
When it comes to buying a house, it can feel like there’s a neverending list of paperwork to complete and things to think about, including the best option for you to actually purchase the house.
A guarantor mortgage is one option that you can look into, particularly if you’re on low income, if you have little or no credit history or if you have a bad/poor credit score.
In our guide to guarantor mortgages, we’ll explain everything you need to know about what they are, how they work and whether you can get a 5% mortgage with a guarantor.
What is a guarantor on a mortgage and how does it work?
A guarantor mortgage is a type of home loan that enables you to buy a house where a close family member such as a parent takes on the financial risk of the mortgage by acting as a guarantor.
It works by the guarantor offering collateral such as their home or savings against the mortgage and in the event that the homeowner defaults on their mortgage payments, the guarantor will be responsible for making the payments.
The pros and cons of a guarantor mortgage
With this type of mortgage there are of course a few pros and cons that you should be aware of before you make your decision.
- It sometimes enables you to borrow 100% of the property’s value as you can use the guarantor’s collateral in place of a deposit.
- It can help you to get a mortgage if you have a bad credit score or no credit history.
- You can sometimes borrow more money with this type of mortgage.
- The guarantor is exposed to a lot of financial risk if you fail to make your mortgage repayments and they could risk losing their own home or savings if they have to step in and pay for your mortgage.
- Interest rates on guarantor loans can often be higher than regular mortgage interest rates.
- If you fail to make your regular repayments on time and your guarantor has to step in to help out financially, both your credit scores could be negatively affected.
You might like: What factors affect your credit score?
Why would somebody need a guarantor mortgage?
There are several instances where someone may need a guarantor mortgage and you could be suitable for one if you fit into one or more of the following categories:
- If you’ve got a small/low deposit - it could be possible for you to borrow 100% of the property’s value with a guarantor mortgage.
- If you’re on a low income - depending on how much you earn, you could be eligible for a bigger guarantor mortgage.
- If you’ve got very little or even no credit history - if you’ve never had the chance to build up your credit history, you might be able to get a guarantor mortgage to help you buy a property.
- If you have a bad credit score - if you’ve got a guarantor mortgage in place, a lender might be more willing to offer you a mortgage as you’ll have a guarantor who can help you to make repayments if you get into financial difficulty.
Budget 2021: New mortgage guarantee scheme
Every year, the Chancellor announces new updates and changes to the Budget in the UK and in March 2021, it was announced that a new mortgage guarantor scheme for first-time buyers was to come into effect to help people buy their first homes.
The scheme by the government offers a guarantee to banks so that they are able to offer people 95% mortgages, which means people are able to buy a home with as little as a 5% deposit. The scheme is proposed to run from April 2021 until December 2022 and houses priced up to £600,000 are eligible.
How much can you borrow with a guarantor mortgage?
The amount of money that you can borrow with a guarantor depends on the type of guarantor mortgage you get, so if you get one that requires a deposit, the amount you can borrow depends on how much you can afford to pay upfront and how much you can afford to repay each month.
However, it is possible to get a 100% guarantor mortgage which means you don’t have to put down any deposit and whether you’re eligible for this type of guarantor mortgage usually depends on how much your guarantor is able to secure against the loan.
Does being a guarantor affect your credit?
Being a guarantor could potentially have a negative effect on your credit score if the homeowner fails to meet their mortgage repayments as you will be liable to make the repayments for them.
However, your score will only really be negatively impacted if you default on the payments too. Otherwise, you will likely just have a mark against your credit report, but it won’t usually affect your score unless you fail to make the repayments as a guarantor.
Who offers guarantor mortgages?
While you can get a guarantor mortgage with some banks, you will usually have to go through a building society in order to get a guarantor mortgage. Some of the top guarantor mortgage providers in the UK include:
- Newbury Building Society
- Buckinghamshire Building Society
Who can be a mortgage guarantor?
You can be a mortgage guarantor if you’re a close family member to the homeowner, and it’s usually a parent.
To be a mortgage guarantor, you will need to have:
- A good credit history.
- A good amount of savings or your own property to offer as collateral.
- Received legal and financial advice from a professional to ensure that you know the risks of being a guarantor for someone.
Do banks accept guarantors for mortgages?
Some banks will accept guarantors for mortgages, but not every lender will, so it’s important to consider this when comparing mortgages from different providers.
With the new government scheme, however, it’s likely that more banks will start to offer guarantor mortgages.