You may be struggling to find a mortgage for yourself if you have a poor or little credit history.
In such cases, opting for a guarantor mortgage is certainly an option that you can look towards.
In this post, I’ll be looking at how guarantor mortgages work and whether going for a guarantor mortgage would be a good idea or not depending on your financial circumstances.
What are Guarantor Mortgages and How do they Work?
A “guarantor” is a person who guarantees the lender that they will cover your mortgage repayments if you, for some reason, are unable to keep up with the mortgage repayments. A guarantor can be anyone, for example, a close family member such as a parent or even a close friend.
It’s also important to note that a guarantor mortgage uses the guarantor’s home as “security” for the mortgage loan.
This means that the lender holds the right to seize possession of the guarantor’s home and sell it off if you and your guarantor are both unable to keep up with the repayments.
The guarantor’s house that is put up as “collateral” reduces the risk for the lender as it ensures that they won’t face a loss even if you aren’t able to keep up with your monthly payments.
The person who agrees to become the guarantor has to add their name into the mortgage agreement which states that they will make the monthly payments if the borrower is unable to do so.
Please note that the guarantor will not own any share of the property that is bought as a result of the guarantor mortgage loan.
It’s important to keep in mind that the guarantor is typically required to put up their own property as “collateral”.
This means that if both the guarantor as well as the borrower are unable to make their repayments, then both of their properties will be at risk.
Always be sure to seek mortgage loans from lenders who are authorised and regulated by the Financial Conduct Authority (FCA).
There do exist some lenders that allow guarantors to put up their savings as security rather than their property. This can be set up in a couple of different ways:
Set Up a Savings Account
The guarantor sets up a special savings account and puts cash into it which is used as security against the mortgage loan. If the borrower starts missing payments, then money is taken from this account in order to pay it off. The savings account can still get interest. It’s not necessary to use this account for the mortgage payments. It’s only to be used if the borrower starts missing payments. If the borrower is making their payments on time, then the guarantor can use this account as a standard savings account.
Set Up a Regular Account
The guarantor puts money into an account that is directly linked to the mortgage loan. There is no interest paid on this account. It’s also important to note that the guarantor cannot get their money back until the mortgage is completely or at least almost completely paid off.
Who are Guarantor Mortgages Aimed at?
Guarantor mortgages are mainly aimed at individuals who:
- Don’t have enough money saved up for the initial deposit on a traditional mortgage. The typical amount for the initial deposit in a traditional mortgage is 10% of the full value of the property.
- Have very limited credit history, e.g., young adults, first-time buyers or individuals who are new to the country.
- Have a bad credit score.
- Don’t have a high income. Lenders decide how much to loan to you based on how much you earn and what your monthly expenditures are. If you can produce a guarantor that is financially more well-off than you are, this may lead to you being able to secure a much bigger loan.
Please note that there are guarantor mortgages which are available to borrowers without any need for an initial deposit/down payment. This type of mortgage is known as a 100% mortgage.
What Are Some Disadvantages and Risks of a Guarantor Mortgage?
The risks involved with a guarantor mortgage are fairly obvious:
As a Guarantor
You will be legally responsible for making the payments on behalf of the borrower if he/she is unable to do so. This may hurt you financially.
If you are also unable to make the payments towards the guarantor mortgage, then you stand to lose your home as well as severely damage your credit score.
It may be difficult to say no to a close family member or friend when they ask you to become a guarantor for you but it’s essential that you take your own financial situation into account.
It’s very important that you seek professional advice before you agree to anyone about becoming a guarantor for them.
As a Borrower
You may not get competitive interest rates with a mortgage with bad credit that requires a guarantor as you would with a traditional mortgage with good credit.
Additionally, if you opt for a bad credit mortgage with a guarantor, you may also not get offered very high loan amounts. Sometimes, the amount of money you’re offered would not be enough for you to fund your property.
If your property purchase is not time-sensitive, it may be worthwhile to wait a few months before you get a mortgage and focus on improving your credit score.
Improving your credit score may lead to you being able to approach traditional lenders who offer mortgages at competitive interest rates.
Not only that but improving your credit rating would also mean that you would not have to find a guarantor for your mortgage.
Hence, while guarantor mortgages definitely exist and are a useful way to get a mortgage and fund your property purchase, it’s definitely worth taking the time to assess whether improving your credit rating and opting for a traditional mortgage would be the better option or not.
Is it Possible to Stop being a Guarantor for a Mortgage?
Guarantor mortgages are fairly strict with their contracts but there do exist some instances where you can stop being a guarantor for a mortgage loan.
If, for example, the borrower’s financial circumstances improve and their credit score reaches a point where it’s decent, you could talk to the lender about opting out of being a guarantor for the mortgage.
You can also get yourself removed as a guarantor in certain circumstances where the borrower has paid off a certain amount of their mortgage.
Guarantor mortgages with bad credit scores are definitely an option that is available to individuals but they do have some pitfalls which you need to take into account.
They are very long-term commitments with serious consequences if you fail to make repayments, so think carefully and assess your finances well before you apply for one.