Many parents want to give their children a leg up on to the property ladder, and guarantor mortgages, family offset mortgages and family deposit mortgages offer a way of doing so.
With parents or close family willing to take on some of the risk of lending to a first-time buyer, lenders are prepared to put up more cash, and at a better interest rate, than they otherwise would.
However, these mortgages come with risks for both the parent and the buyer, so it’s important to consider very carefully whether they are the right option for you.
What is a guarantor mortgage?
With a guarantor mortgage, a parent or close family member guarantees the mortgage debt. This means that if the buyer misses their mortgage repayments, the guarantor will have to cover them.
Traditionally with these types of mortgage, parents were responsible for repaying the whole loan if their child defaulted on their mortgage payments.
There are, however, increasing numbers of mortgages on the market that place limits on the amount the guarantor is responsible for.
How guarantor mortgages work
Aldermore is just one example of a lender that offers a guarantor mortgage.
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 property.
This means that, in the worst case scenario, a guarantor could lose their home to cover the debt. But if no repayments are missed, it won't cost the guarantor a thing.
Family offset mortgages
With family offset mortgages, parents or grandparents put their savings into an account linked to their child's mortgage.
The money in this account is then deducted from the mortgage, making the child's repayments cheaper.
There is a potential downside to this type of mortgage, however.
Parents will be able to get their money back in full, but they may have to lock it away until the mortgage has been paid off to between 75% and 80% of the property's value, which could take quite a long time.
Parents also won't receive any interest on their savings while they are offsetting their child's mortgage.
Yorkshire Building Society offers this type of deal.
Family deposit mortgage
Some lenders offer mortgages where a family member deposits cash in a special savings account and the money is held as security against the mortgage.
This cash is then held for a fixed period of time. If the mortgage borrower defaults during this period, the money will be taken from this account.
The benefit of family deposit mortgages is that the family member still gets interest paid on the money linked to the mortgage, although the rate might not be as good as with other savings accounts. And if the borrower meets all their repayments, it won't cost their family anything.
Flexible family mortgages
The Family Mortgage from the Family Building Society offers a flexible approach for relatives looking to help.
Provided that the first-time buyer has a 5% deposit, parents or family members have three options.
The first option is to put 20% or more in a savings account that pays interest as security for the loan.
The building society still provides a 95% mortgage to the first-time buyer, but the security provided by the family member's savings means that the buyer pays a lower interest rate.
The second option is for the parent or family member to use some of the value in their own property as security, and the third option is for the family member to place savings in an offset account, which reduces the amount of the mortgage on which interest is charged.
100% 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.
You can find out more about this deal in our news story: Is this the return of the 100% mortgage?
First start mortgage
If you have saved at least a 5% deposit, but are limited on how much you could borrow, the Posit Office First Start mortgage could help.
It allows you to include a family member's income in your mortgage assessment to help you borrow more.
Both parties will be responsible for the total loan and monthly repayments and there is an option for the sponsor to become a joint owner.
If you want to buy a place with a family member like a brother or sister a joint mortgage might be more suitable.
Lenders will normally allow up to four people to share a joint mortgage.
Unlike a guarantor mortgage, with a joint mortgage each party will be named on the property deeds and be responsible for the mortgage repayments each month.
- Find out more: joint mortgages
Get professional advice
Guarantor mortgages are tricky to navigate because of the range of different products and potential downsides for those agreeing to help you out.
So it’s a good idea to seek professional advice if you are thinking about going down this route.
You can talk through the pros and cons with an expert using Which? Mortgage Advisers . Call 0800 2942 849 for a free chat.
Correct as of date of publication.