What Is A Guarantor Mortgage & How Do They Work?
For first buyers struggling to get the mortgage they need, a guarantor mortgage could be the answer. Find out what they are, and how they work in our guide.
What is a guarantor mortgage and how do they work?
You will have heard of a first-time buyer mortgage, perhaps also a remortgage, but what about a guarantor mortgage?
A guarantor mortgage is a handy but little-known type of home loan that enlists the help of family or friends. They agree to support your mortgage application in one way or another, bringing you several steps closer to your homeownership dreams. And let’s face it, if you’re a first time buyer right now you need all the help you can get.
For home buyers who are struggling to raise a large enough house deposit, or whose income simply isn’t enough to get the mortgage they need, asking a family member or friend to act as a guarantor could be the answer.
What is a guarantor mortgage?
A guarantor on a mortgage is someone who is willing to help you get on the property ladder. Traditionally, a mortgage guarantor would be a family member or friend, who acts as a 'back-up' in case the home buyer cannot make the mortgage payments. However, they are not named on the deeds of the property, and won’t own a share of the property. Today, there are lots of different guarantor mortgages which allow friends and family to help you get on the property ladder.
How does a guarantor mortgage work?
Traditionally, guarantor mortgages work by the guarantor signing a contract that makes them legally responsible for the mortgage payments should the home buyer be unable to pay. They will be asked to offer up some collateral to the mortgage lender as security for the mortgage, which is usually either savings or a chunk of their own equity that they have built up in their home to cover your debt if the need arises. There is a generally a time limit for the bank to hold these as security. As long as you pay your mortgage on time, the guarantor’s security is released when the agreement expires.
Savings as collateral
If the mortgage is secured against savings, then the mortgage guarantor deposits money (typically between 5-20% of the house value) into a savings account that is held by the lender. They cannot access the money until the mortgage is paid off.
Property as collateral
If the mortgage is secured against the guarantor’s property, then the guarantor agrees that their property is used as collateral if the buyer is unable to pay.
Your guarantor will only be asked to repay your debt if your home is repossessed. Were this to happen, the bank puts the house on the market to sell and the money from the sale goes towards clearing your mortgage. If there's a shortfall, that's when the guarantor will be asked to pay up, either using the savings which was used as collateral or equity held in the guarantor's property.
This may sound dramatic, but in truth banks try all sorts of measures to help you with your repayments before it gets that far. Remember, it always pays to ask for help instead of suffering in silence. You can read more about the benefits and risks of guarantor mortgages in our guide here.
Traditional guarantor mortgages aren't widely used any more. A much more popular option is an Income Boost, which works in a very similar way - read more about them below.
What types of guarantor mortgages are there?
Today, there are lots of options for the modern day guarantor mortgages. These range from signing an agreement to step in to repay the balance of your debt if you default, to the next generation of guarantor mortgages, where existing property or income is used to increase the buyer's affordability. Below, we run over the some of the types available from our panel of over 100 lenders:
1. Family springboard mortgages
First, let's look at family springboard mortgages. These are on offer at a few lenders, but here we'll run through the Barclays offering, which we can advise you on.
To get you on the property ladder, Barclays will require your family member or friend to deposit 10% of the home purchase price into a special savings account for five years. Buyers can choose to put down a deposit of up to 9.9%, or can avoid a deposit altogether. After five years, providing you're on track with your payments, Barclays return your mortgage guarantor's savings along with any interest that has accumulated in that time. The drawback here is that your guarantor can't access their hard-earned savings for a considerable amount of time. This could leave them in a sticky situation if unexpected expenses arise, or they might miss out on an exciting opportunity because their money is tied up.
It also makes the big assumption that your mortgage guarantor has 10% of your purchase price available in cash. Following the latest House Price Index, that's a bill of over £25,000 for your guarantor. This is why springboard mortgages aren't for everyone, but are still an option worth considering. You can read more on how family springboard mortgages work in our guide here.
2. Joint borrower sole proprietor mortgages
Another solution is to use a new type of guarantor mortgage agreement called a joint borrower sole proprietor mortgage. That’s a bit of a mouthful, so at Tembo we call this Income Boost. A joint borrower sole proprietor mortgage allows your parents or helpers to join you on the mortgage to boost the amount of money the bank will lend you. They agree to be jointly responsible for the payments (that’s the joint borrower bit) without being listed on the property deeds. That makes you the sole proprietor and they avoid the hefty stamp duty bill when they move home.
There are other deals where parents can join their kids on the actual mortgage itself, but the big stinger here is that your mum and dad will be named on the property deeds with you. This means that they have inadvertently become second homeowners. The next time they move house and buy a new one, the tax man will charge them more in stamp duty.
Joint Borrower Sole Proprietor mortgages are mostly offered by smaller building societies, but Barclays and HSBC are flying the flag for the big banks. Create a plan with us today to find out more about mortgage options you could be eligible for to boost your borrowing potential.
What an Income Boost mortgage is and how they work
3. Gifted mortgage Deposit Boost
One of the stumbling blocks of a lot of first time buyers is saving a large enough house deposit.. In fact, in our First Time Buyers Report, we found that the average first time buyer needs a £60,000 deposit to buy a property in the UK, even more in London. With a rising cost of living, it's often impossible for a lot of renters to save anywhere close to this figure. This is where our Deposit Boost comes in, an accessible alternative to 100% mortgages.
A Deposit Boost is essentially a gifted deposit, where a family member or friend who owns a property releases money from their home to gift to you as a deposit, or to add to your current pot. It works by setting up two mortgages; a first-time buyer mortgage for you and a mortgage for your helper (we like to call them homeboosters) to release money from their property to gift to you. The money raised by the homebooster’s mortgage is the cash you will use for your house deposit. The balance of the homebooster loan does not have to be repaid until they sell their property and they can choose from plenty of flexible deals from a two-year fix to a lifetime mortgage.
With an enhanced deposit, you can get a mortgage with lower interest rates, making your monthly payments more affordable. Our average Deposit Boost user saves £17,000 over 5 years in interest fees alone!
If you have family or friends who own their own home and want to help you own yours, a Deposit Boost is worth considering. And you might be surprised how much people do want to help, if you ask. Research shows that three quarters of parents whose income had taken a hit during the pandemic said they were still determined to support their kids’ property buying dream. If you are apprehensive about talking to your family about money or getting an inheritance early, read our guide here.
What a gifted Deposit Boost is and how it works
How would a guarantor help me get a mortgage?
Saving for your first house deposit is tough. With house prices at record highs and savings rates at an all-time low, the cards are stacked against young home buyers. In the space of a year, the average deposit needed by a first-time buyer went up by £12,000 to £59,000 and in the capital, it is even worse. London's first-time buyers put down an extra £20,000 compared to last year, taking the average deposit in London to an eye-watering £132,685.
Having a guarantor on your mortgage through the support of your family or friends, can help you buy with a much smaller deposit saved, or even none at all. A mortgage guarantor can also help you if you're not able to borrow enough money to buy the home you want because of your salary, or are finding it hard to buy a house by yourself. New buyers aren't the only ones who can benefit from the help of a mortgage guarantor. If you're moving up the property ladder because you've outgrown your used-to-be cosy but now cramped apartment, you can still benefit from the help of a guarantor.
You can read more about the benefits and risks of boost and guarantor mortgages in our guide here.
How Tembo can help
With a panel of over 100 mortgage lenders, our team of expert mortgage brokers can advise you on whether a guarantor mortgage is the best option for you and your family, as well as walk you through the other lending schemes out there. To get started, create a plan on our homebuyer platform today to get a clear view of what your maximum buying budget could be and the options available.
Finding out more is easy. Make a plan to see how Tembo could help you with your property purchase.
Once we’ve given you the thumbs up, we’ll get you booked in for an introductory call with one of our guarantor mortgage experts and get you on your way.