What are the benefits and risks of guarantor mortgages?
Guarantor mortgages can be a really helpful option for many first-time buyers and remortgagers, but due to the fact that they are more complex and not widely offered by mortgage brokers, they’re not very well known or understood. Whether you're a first-time buyer trying to get on the ladder, looking to move up to a bigger home, or remortgaging to get a better deal, a guarantor can help boost your borrowing power. This guide explores the risks and benefits to help you understand how a guarantor could help buyers in their journey to homeownership.
For those unsure what guarantor mortgages are or want to understand how they work,read our guide here.
Why might a guarantor mortgage be needed?
If you're a first-time buyer, you might be considering asking loved ones for help - and you're not alone in that. We know getting on the property ladder feels challenging right now. Over the past few decades, the UK has experienced skyrocketing house prices, increasing by 207% since 2000. Pair that with stagnating wages, and a lack of affordable housing, this helps explain why there are half the number of first-time buyers than there were in the 1980s, and more people than ever are reliant on the Bank of Mum and Dad.
Guarantor mortgage risks and benefits at a glance
Benefits of guarantor mortgages
Boost borrowing power: Guarantor mortgages, like Joint Borrower Sole Proprietor mortgages such as NatWest's Family-Backed Mortgage and Barclays' Mortgage Boost,t can help buyers boost their borrowing capacity by adding a loved one's income to their mortgage application.
Reduce deposit requirements: Some guarantor mortgages, like a Savings as Security mortgage or Deposit Boost, can allow a home buyer to potentially get a mortgage without putting down anything up front.
Potential inheritance tax benefits: A gifted deposit can be a way for families to give money to loved ones earlier in life, which may reduce inheritance tax liability in years to come. Buyers and guarantors should always seek advice from a tax advisor to consider this benefit further.
Risks of guarantor mortgages
Risk is shared: If the buyer defaults on mortgage payments, a guarantor will be expected to step in, covering the mortgage payments, or their home or savings being used (in a worst-case scenario), depending on what's been used as security on the mortgage.
Savings are locked away: If you opt for a Savings as Security or family springboard mortgage, the guarantor's savings they've put up as security won't be accessible until after the fixed period, typically 5 years.
Credit scores are linked: A guarantor and a home buyer's credit scores can become linked. So, if someone fails to make repayments, this could affect both credit scores.
Impact on future borrowing: Acting as a guarantor can affect the guarantor's ability to borrow in the future, as lenders will factor in this commitment when assessing affordability.
Who can be a guarantor on a mortgage?
While guarantors are typically parents, relatives, or close friends, lenders do have specific requirements they'll need to meet. As a guarantor, you'd be required to step in to make the mortgage payments if the borrower can't. You can read more about Who can be a guarantor on a mortgage in our guide here.
Will being a guarantor affect my ability to get a mortgage?
Something to keep in mind: if you're a guarantor and later want to apply for your own mortgage or loan, lenders will factor in your guarantor commitment when working out what you can borrow. This shouldn't put you off helping a loved one onto the ladder, but it's worth being aware of so you go into a guarantor mortgage fully aware of its impact.
For many parents, helping their children get onto the ladder is an extremely rewarding experience, helping them to achieve more financial security than they had while renting. This was exactly how Jo felt, helping her son Liam to buy his first home in London through an Income Boost and Deposit Boost:
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Which lenders offer guarantor mortgages?
Several high street banks and building societies offer guarantor mortgages, including Barclays, NatWest, Kent Reliance, and Leeds Building Society. At Tembo, we can help you compare options across all these lenders to find the best deal for your situation.
Want to know which banks and lenders offer guarantor mortgages and how to choose between them? We've put together a guide on exactly this, which you can find here.
Can I get a guarantor mortgage if I have bad credit?
If a borrower has bad credit, it is possible to get a guarantor mortgage. That said, if both you and your guarantor have credit issues, it will be more challenging - though not necessarily impossible. When lenders look at your mortgage application, they will take into consideration what caused the poor credit and how long ago it was.Read our guide to credit here for more information.
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