How Do Guarantor Mortgages Work?
(Last Updated: 13/06/2023)
28/06/2022
71
7 min read
Key Takeaways
- When getting a mortgage, some lenders offer you the choice of getting a guarantor mortgage. In this context, a family relative will take on the liability of the mortgage, without having any share or interest in the property.
- To qualify as a guarantor, you will need to own a property of your own, or have savings, and have a good credit score. Other conditions may be imposed by some lenders.
- If the borrower is unable to make the monthly repayments, the guarantor is liable to help.
What is a guarantor mortgage?
A guarantor mortgage, or family assist mortgage is a type of mortgage, or home loan, where a 'guarantor' (usually a parent or older relative) shares the risk of the mortgage by agreeing to take on some of the liability for the loan. This means that if the borrower is unable to afford their mortgage payments, the guarantor would help. We'll get to how that works later.
The guarantor does not own any share in the property and is not named on the deeds.
Can you get a mortgage with bad credit but a guarantor?
A family assist mortgage can enable people who otherwise might not be approved for a mortgage, to get one, or to borrow more than they could on their own. For example:
- You don't have a big enough deposit - some guarantor mortgages allow you to borrow up to 100% of the property.
- You don't earn a lot - the amount you can borrow depends on your income, a guarantor may enable you to borrow more.
- You have a poor credit score - if someone with a good score will guarantee your mortgage, lenders may be more inclined to lend with you.
- You don't have enough credit history - if you have no history of borrowing for example if you're young or new to the country, lenders don't have enough evidence that you'll repay yet.
Who qualifies as a guarantor?
All guarantors must have:
- Property of their own (or savings)
- Good Credit
Lenders generally do a 'soft check' on the guarantor's credit, which will not effect their credit rating. You should double check with your lender that they do not run 'hard checks' on the guarantor's credit. Some lenders will also require your guarantor to:
- Be a family member
- Receive independent legal advice
- Have paid off 50-100% of their mortgage
If the guarantor is still paying off a mortgage, they will need to have a high enough income to show they could afford both mortgages if the borrower fails to pay.
Are you helping a family member get a mortgage?
All guarantors should receive independent legal advice before taking on the risk involved with guaranteeing someone else's mortgage.
Our expert guarantor mortgage solicitors will make sure you know what you're signing and draw your attention to any unfair terms in your mortgage. Get in touch to find out more about our legal advice services.
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How do guarantor mortgages work?
The borrower pays the monthly repayments as with a regular mortgage. As long as they don't miss any payments the guarantor won't have to do anything.
Regular mortgages are secured on the property being bought by the borrower. Family assist mortgages are also secured against the guarantor's property, or savings. This gives an extra layer of security for the lender.
Savings - If the guarantor is securing the mortgage using their savings, they deposit 10-25% of the property's value into a special account held by the lender. They cannot access that money for a set period of time. Mortgage products differ.
Property - If the guarantor is securing the mortgage against their own property then their home may be used as collateral.
What happens if I can't pay my guarantor mortgage?
Most lenders have some flexibility when it comes to late payment. Often the first late payment will be accepted with a late payment fee and if your circumstances have changed you may be able to extend your mortgage term and reduce your monthly repayments.
If you default on the mortgage, the guarantor becomes liable. The lender may repossess the borrower's property and sell it to recoup their loan. If the property has gone into negative equity (it is worth less than the loan), then the guarantor is liable for making up the shortfall.
For example:
- 1
You bought a property for £200,000 with a £20,000 deposit. The mortgage was worth £180,000 at that time.
2You have repaid £20,000 in total against the mortgage (not including interest).
3The market has fallen, a new motorway is planned nearby and you have begun renovations which are unfinished.
4The property is repossessed and sold at market value at £150,000.
5A further £10,000 is owed. If the guarantor is unable to produce these funds, then their home could be repossessed and sold to release the £10,000 plus interest.
If the loan has been secured against the guarantor's property, then the funds will be paid out of this account. Both the borrower and the guarantor's credit ratings are at risk if the borrower fails to make their payments in full and on time.
Is a guarantor mortgage a good idea?
These mortgages can help borrowers to buy where they otherwise may not have been able to. However, there are risks involved:
- Entering into a financial agreement can put a heavy strain on family relationships.
- Both the borrower and the guarantor risk their credit rating if the borrow fails to keep up their payments.
- The guarantor could lose their savings or their home if the borrower defaults and the property has fallen into negative equity.
- If the guarantor's circumstances change, the additional financial burden may be too much for them.
- If the guarantor is securing the loan against their savings, they will not have access to this cash, even in an emergency, until the terms of the mortgage release them.
The best way for a borrower to minimise the risk to their guarantor is to keep on top of their finances and to remortgage to a mortgage product without a guarantor as soon as they have paid off enough of the original loan.
Speak with your lender to find out how much that is, or ask your mortgage broker to include this information when comparing products for you.
Get reliable impartial legal advice on your mortgage
Both the borrower and the guarantor should get legal advice from separate solicitors, to catch any nasty surprises in the mortgage terms and ensure you both understand the risks.
If the risks are unreasonable, your solicitor will advise you not to accept the terms. You can instruct them to negotiate better terms on your behalf.
Frequently Asked Questions
HOW-MUCH
DEPOSIT
GUARANTOR-DEATH
RATES
RETIRED
Written by:
Caragh Bailey
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
Reviewed by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
