If you’re considering a guarantor mortgage, you may be confused by the lender’s fees as well as what your monthly payments are going to look like.
Guarantor mortgage fees are even more difficult to calculate than regular mortgage loan fees which is why it’s a good idea to use a guarantor mortgage calculator which you can easily find online.
In this post, I’ll be looking at what guarantor mortgage fees typically look like and how you can determine what your repayments will be before you enter into any sort of agreement.
Guarantor Mortgage Fees and Payments
Guarantor mortgages involve a third party which is called the guarantor who guarantees to keep up payments on behalf of the borrower in the case that the borrower starts to fall behind on their monthly payments.
This structure of guarantor mortgages makes them very different from traditional mortgage loans in terms of what’s at stake if the borrower and guarantor both fail to make the payments.
Guarantor mortgages typically require guarantors to put up their own homes as collateral for the mortgage loan (Some lenders allow guarantors to put up savings as collateral instead of their homes).
This would mean that if both the guarantor and the borrower fail to keep up monthly payments, then the guarantor’s home may be repossessed and sold off.
Please note that when it comes to these types of mortgages, your name is on the title deed and you, the borrower, are the only one who’s the sole owner of the property. The guarantor does not have any share in the property you buy using the loan.
Please note that this will mean that you will have to cover costs such as stamp duty on your own.
Always ensure that the lender you’re approaching is authorised and regulated by the Financial Conduct Authority (FCA) and is registered in England, Wales or Northern Ireland. You should make this check any time you’re dealing with any type of financial services.
This is important because if they are not authorised and regulated by the Financial Conduct Authority, then they could treat you unfairly without regulation.
How can I Tell if a Mortgage with a Guarantor would be Suitable for Me?
I always stress people to carefully assess their finances and be very sure that such a mortgage would definitely be the best option for them before they jump into an agreement with a lender.
So, how can you be sure that such a mortgage loan would be right for you when you’re funding a home purchase? Well, here are some ways to tell:
- If you do not have enough money for the initial deposit/down payment (usually 10% of the house’s full value) but are confident that you will be able to keep up with monthly payments.
- You have a bad credit score or have no credit history at all, e.g., usually in the case of young adults/first-time buyers.
- You have low income and there’s a chance you may struggle to keep up with your mortgage payments down the line.
It’s essential for you to be completely confident that you will be able to keep up with repayments on your mortgage and if you can’t, your guarantor will be able to keep them up on your behalf.
This is why you should discuss this thoroughly with your potential guarantor and make sure that they understand what their responsibilities are going to be.
It’s important for you as a borrower to understand that your guarantor is only there as a backup. You must fully take your responsibility towards your payments seriously and do your best to ensure that your guarantor does not have to make payments on your behalf.
Both you and your guarantor’s homes may be repossessed if you fail to keep up repayments on your mortgage. If you fail to make your payments, then your guarantor will have to do so on your behalf and this may result in their credit rating falling and/or them being hurt financially.
As you can imagine, not only will this be a great source of stress and financial turmoil but it will also lead to difficulties in your relationship with your guarantor.
What are the Different Types of Guarantor Mortgages?
You could only borrow about 75% of the total value of the house from lenders in the past but in recent years, with increasing competition, lenders have increased that amount up to 100%.
There are a number of different guarantor mortgages you can consider to fund your home in England and Wales.
Family Deposit or Springboard Mortgages
This type of mortgage requires your guarantor to deposit savings into a savings account with the lender. The amount of savings entered into the account are typically anywhere between 10% to 20% and these are used as ‘security’ by the lender.
Due to these savings being submitted as security, the lender is comfortable offering a loan amount of up to 95% or even 100% of the total value of the property.
If the borrower keeps up with his/her payments, then the money in the savings account is not taken out by the lender. In fact, it can even earn interest over time.
Joint Borrower or Sole Proprietor Mortgages
This mortgage would involve the loan to be in joint names, i.e., the borrower and the mortgage guarantor, but the ownership of the home would be only in the borrower’s name.
The advantage of this type of mortgage is that even if your guarantor has his/her own home, you can still qualify as a first-time buyer if it’s your first home.
This would enable you to qualify for first-time buyer stamp duty relief and thus, you would not have to pay stamp duty land tax.
Family Link Mortgages
These types of mortgages are offered by the post office and can be a great option for you if you don’t have enough money for the initial deposit/down payment on a traditional mortgage.
This would involve you borrowing 90% of the home’s total value as a mortgage loan with the remaining 10% being borrowed as a loan which is secured against your guarantor’s home.
Family Offset Mortgages
These work in pretty much the same way as regular offset mortgages except the savings that are used to offset your mortgage payments are provided by your guarantor and not by you.
These savings are tied to the mortgage loan and they are deducted in order to make up for the interest on the mortgage loan.
For example, if your mortgage is for £100,000 and your guarantor has provided £20,000, then you will be paying interest for only £80,000 of the mortgage.
This can be a great avenue for low-income buyers.
Mortgages with a guarantor can be a useful way to fund your home purchase but they definitely cost more and have other pitfalls which you need to be aware of.
Make sure both you and your guarantor know what you’re getting into before you sign any form of agreement.