What is a guarantor mortgage?
A guarantor mortgage is a mortgage where a parent or family member takes on some of the risk by offering their home or savings as security on the loan. On the plus side, this means that the person buying the property is more likely to get a mortgage, or to be able to borrow more at better rates. On the downside, the guarantor will be liable for any missed mortgage payments.
Find out more in our video and in the advice below.
How guarantor mortgages work
With a guarantor mortgage, both you and your guarantor are responsible for the mortgage repayments. If your circumstances change during the mortgage (for example, if your salary increases) so that you can afford the repayments by yourself, your guarantor can be released from their responsibility.
The guarantor will also generally be released once you've paid off a certain amount of your mortgage, or after a set time period (for example 10 years).
Aldermore is just one of the many lenders currently offering guarantor mortgages. Aldermore's deal allows the buyer to borrow up to 100% of a property's value. A parent or grandparent must then guarantee the amount above 75% of the value of the home.
Normally, the family member guaranteeing the mortgage offers their own property as collateral against the loan. They must own a sufficient share of their property outright in order to qualify as a guarantor.
- Find out more: 100% mortgages
What is the guarantor liable for if you can't pay your mortgage?
With a 'traditional' guarantor mortgage, your parents are responsible for repaying the whole loan if you default on your mortgage payments. In the worst case scenario, this could mean them losing their home to cover the debt.
For example, if you owed your lender £150,000 but your lender was only able to recover £125,000 by repossessing your property and selling it, your guarantor would be liable for the remaining £25,000.
If your guarantor couldn't find the money, their home could be repossessed as well.
However, these days the guarantor's liability will usually be capped at 25-35% of the value of your mortgage, so this is the most they would be responsible for repaying if you were unable to meet your repayments.
- Find out more: other ways parents can help first-time buyers
Who are guarantor mortgages suited to?
A guarantor mortgage could be suitable if you’re looking to buy a property and have:
- A low income - for example, you may want to borrow more than your income would allow under your lender’s affordability test
- A small deposit or no deposit
- A bad credit score
- Little or no credit history - for example, if you've never had a credit card
An independent mortgage broker will be able to advise on whether a guarantor mortgage is a suitable option for you.
Types of guarantor mortgage
Mortgage lenders are aware how difficult it can be to get on the property ladder and are developing increasing numbers of options to help.
These tend to be branded with similar-sounding names, so below we've explained some of the most popular options and the differences between them.
If you'd rather have a one-to-one chat with an expert, you can call Which? Mortgage Advisers for a free consultation on 0800 197 8461 or fill out the form at the bottom of the page for a free call back.
Family offset mortgages
With family offset mortgages, parents or grandparents put their savings into an account linked to the homebuyer's mortgage. The amount in the account is deducted from the amount of the loan that 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. This means you could either reduce your monthly repayments or pay off your mortgage more quickly.
There is a potential downside to this type of mortgage, however. While parents or grandparents will eventually get their money back in full, they may not be able to access it until your outstanding loan is equal to 75-80% of the original property price, which could take some time.
Your family members also won't receive any interest on their savings while they're offsetting your mortgage.
Yorkshire Building Society offers this type of deal.
Family deposit mortgage
Some lenders, including the Family Building Society and Barclays, offer mortgages where a family member deposits cash in a special savings account and the money is held as security against the mortgage for a set amount of time.
The benefit of family deposit mortgages is that your family member still gets interest paid on the money linked to the mortgage, although the rate might not be as good as they'd get with other savings accounts. And if you meet all your repayments, it won't cost your family a thing.
If you fail to make a mortgage payment during this time (known as 'defaulting' on your mortgage), the money could be held by the lender for a set period. If you were to sell the property for less than the outstanding amount on the mortgage, the lender could recoup the difference from your family member's savings.
Family link mortgage
The Post Office Family Link mortgage offers the chance to borrow 100% of the property's value.
With this deal, 90% of what you borrow is a mortgage and 10% is a loan secured against a parent or other family member's home.
However, your guarantor will need to own their home outright for you to qualify for this deal.
When we reported the launch of this deal in April 2018, it worked out as a relatively expensive option, with the 4.98% interest rate on the 90% mortgage being far higher than the best rate on a regular 90% mortgage, which was 2.34% at the time.
However, comparing mortgages is never simple: the Family Link mortgage was fee-free, while the 2.34% deal from Barclays came with a £999 fee. To complicate matters further, the 10% loan against the parents' property, which forms part of the Family Link deal, was interest free.
As demonstrated by the example above, guarantor mortgages are complicated to say the least - so it’s a good idea 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.