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Guarantor mortgages

Find out what a guarantor mortgage is, the pros and cons, and the different types - including family deposit mortgages and family offset mortgages.

In this article
What is a guarantor mortgage? Video: guarantor mortgages explained Who are guarantor mortgages suitable for?
What types of guarantor mortgage are available? Get personal advice on guarantor mortgages
 

What is a guarantor mortgage?

A guarantor mortgage is a home loan where a parent or close family member takes on some of the risk of the mortgage by acting as a guarantor. This usually involves them offering their home or savings as security against the loan, and agreeing to cover the mortgage payments if the homeowner defaults (misses a payment).

On the plus side you might be more likely to get a mortgage, and be able to borrow more or at a better rate of interest. The main downside is that the guarantor will be liable for any shortfall if your property had to be repossessed and sold.

You can borrow up to 100% of a property's value with a guarantor mortgage, and the most you can borrow in cash terms is £500,000.

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Video: guarantor mortgages explained

Our short video explains the basics of how guarantor mortgages work.

Who are guarantor mortgages suitable for?

A guarantor mortgage could be suitable if you're looking to buy a property with:

  • A low income: lenders will decide how much mortgage to offer based on your income - having a guarantor may enable you to get a bigger loan.
  • A small deposit, or no deposit: you could borrow up to 100% of a property's value with a guarantor mortgage.
  • A bad credit score: having a guarantor might make a lender more inclined to offer you a mortgage.
  • Little or no credit history: for example, if you've never had a credit card.

An independent mortgage broker can give you more in-depth advice on whether a guarantor mortgage is suitable for you.

What types of guarantor mortgage are available?

Over the last couple of years increasing numbers of guarantor mortgages have been launched, often with different but similar names. Below, we explain some of your options and how they differ.

Traditional guarantor mortgages

With a traditional guarantor mortgage, both you and a family member are responsible for the mortgage and the monthly repayments. This means that if you aren't able to make the monthly repayments, your guarantor will need to cover them.

A mortgage lender will take into account both your and your guarantor's incomes, to check that your guarantor could cover your repayments if you defaulted. This means that you might be able to borrow more.

If missed repayments meant that the lender had to repossess and sell your property, both you and your guarantor would be responsible for any shortfall if the property was sold for less than the amount still owed on the mortgage.

For example, if you owed the lender £150,000 but they were only able to recover £125,000 by repossessing and selling your property, you and your guarantor would be liable for the remaining £25,000.

If your circumstances change during the mortgage - for example, if your salary increases, or the value of your property goes up so that you can afford the repayments by yourself - your guarantor could be released from their responsibility.

Post Office Money offers this type of deal, offering up to 95% of a property's price.

Family deposit mortgages

With a family deposit mortgage, your family can offer their savings or property (or both) as security for your mortgage.

  • Savings as security

Some lenders, including Barclays and Marsden Building Society, offer mortgages where a family member deposits cash (typically 10-20% of the property price) in a special savings account.

The money is held as security for your mortgage for a set number of years, or until the amount you owe falls below a certain percentage, for example 75% of the property's value.

Your family member can still earn interest on the money linked to your mortgage, although the rate might not be as good as they'd get with other savings accounts.

If you miss any mortgage repayments, the lender could hold on to your family member's savings for a longer period. If the lender had to repossess and sell your property, and received less than what you still owed on your mortgage, they could recoup the difference from your family member's savings.

  • Property as security

Alternatively, your family member can provide a charge over their own home - typically between 20% and 25% of the value of the property you're buying - as security for your mortgage.

Your family member will usually need to own a certain share of their property outright. This varies between lenders but can be between 25% and 60%.

In the worst case scenario, if the lender had to repossess and sell your property for less than the amount remaining on the mortgage, your family member could lose their home.

Family offset mortgages

With a family offset mortgage, such as those offered by Vernon Building Society and Family Building Society, your family member puts their savings into an account linked to your mortgage. They won't earn interest on their money, but the amount equal to their savings is deducted from how much of the loan you pay interest on.

For example, if you took out a mortgage of £100,000 and your family member deposited £20,000 into the account, you would only pay interest on £80,000 of the loan, reducing your monthly repayments.

But there are downsides to this type of mortgage for your family member. While they'll eventually get their money back in full, they might not be able to access it for a pre-agreed number of years, or until your outstanding loan reaches a set amount - for example 75% of your property's value - which could take some time.

If you miss any mortgage repayments, the lender could hold on to your family member's savings for a longer period. If the lender had to repossess and sell your property, and received less than what you still owed on your mortgage, they could recoup the difference from your family member's savings.

Family Link mortgage

With the Post Office Family Link mortgage you can borrow up to 100% of a property's value. You borrow 90% with a mortgage against the property you're buying, and the remaining 10% as a mortgage secured against your family member's home, which they must own outright.

Both you and your guarantor are responsible for the 10% loan, which is repaid in the first five years. If you miss any of your mortgage repayments, your family member is only responsible for the 10% that you borrowed against their home.

At the time of writing, the Family Link mortgage works out as a relatively expensive option. The initial interest rate of 4.69% (which is a five-year fixed-rate) is much higher than the best rate of 2.29% on a regular five-year fixed-rate 90% mortgage.

But comparing mortgages is never simple: the Family Link mortgage is fee-free, while the 2.29% deal (from HSBC) comes with a £999 fee. To complicate matters further, the 10% loan against the family member's property, which forms part of the Family Link deal, is interest-free.

Get personal advice on guarantor mortgages

Guarantor mortgages can be complicated, not to mention risky for your family members, so it’s a good idea for both you and your family to seek professional advice if you're thinking about going down this route.

Which? Mortgage Advisers can give you expert help in working out the best option for you and your family, and can also guide you through the mortgage process from initial application to completing and moving in.

Call 0800 197 8461 for a free chat, or request a call back using the form below.

 
 

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