If you’re shopping around for mortgages and have been told that you will need a mortgage guarantor to be accepted, you may be wondering ‘what is a mortgage guarantor? A mortgage guarantor is an individual or organisation that agrees to cover a borrower’s mortgage repayments if the borrower is unable to do so. Guarantors can be used if the borrower has little or no equity in the property, a very low deposit, lacks a good credit history, or has an income that isn’t guaranteed, such as self-employment. The guarantor’s liability is typically limited to the outstanding balance of the loan.
Read on for more information about mortgage guarantors, including what they do and how they can help you get approved for a mortgage deal.
When Is A Guarantor Needed?
Mortgage lenders will often require a guarantor when the borrower has a bad credit history, does not have enough income to qualify for the loan on their own, has a very small cash deposit compared to the overall property value, or is otherwise considered to be a high risk for lending.
By the guarantor agreeing to make the loan payments if the borrower is unable to do so, this reduces the risk for the lender and makes it more likely that the mortgage application loan will be approved.
Who Do Guarantor Mortgages Suit?
Guarantor mortgages can be a good option for a first time buyer who may struggle to get approved on their own, as well as people with bad credit or low incomes. If you’re self-employed, a guarantor mortgage could also suit you as your income may not be considered guaranteed by the lender.
It’s important to remember that if you do default on your mortgage repayments, not only will this impact your credit score and ability to get future loans, but it could also put a strain on your relationship with the guarantor.
What Do They Do?
The guarantor agrees to make the loan payments if the borrower is unable to do so. Having a guarantor can help to increase the chances of homebuyers getting approved for a mortgage, but it is important to understand that this is a serious commitment.
If the borrower defaults on the loan, the guarantor will be legally responsible for repaying the debt, which could total hundreds of thousands of pounds. When using a guarantor for your mortgage, their credit score is used instead of yours, and they are typically required to provide proof of income and assets.
Who Can Be A Guarantor?
A guarantor can be anyone, including a close family member or friend. Professional services are also available to provide mortgage guarantors. It’s important to note that a guarantor is not liable for the balance of the loan if the property is sold unless they signed a promissory note agreeing to this.
Whilst there are few restrictions on who can act as a guarantor, mortgage guarantors will need to have good credit themselves and enough income to cover the loan payments if the borrower can’t.
How Can A Mortgage Guarantor Help You Get Approved For A Loan?
When you’re applying for a mortgage, the lender will assess your ability to repay the loan based on your income, employment history, and credit score.
If you have a low income or bad credit, you may struggle to get approved for a loan but if you can find a guarantor who is willing to co-sign the loan with you, you may be able to get approved.
This is because the guarantor’s income and credit score will be taken into consideration when assessing your loan application, which can increase your chances of being approved if they have sufficient income and stable savings accounts.
In addition, the guarantor will be responsible for repaying the loan if you default on it, which can give the lender peace of mind and make them more likely to approve your loan. If you’re having trouble getting approved for a mortgage, finding a guarantor may be the best option for you.
What Are The Benefits Of Having A Mortgage Guarantor?
- Having a guarantor can strengthen your mortgage application. As a result, you could be offered a higher mortgage amount and lower interest rates than you would qualify for without one.
- Enlisting a guarantor can provide peace of mind in knowing that there is someone else responsible for making the mortgage payments if you are unable to do so. Whilst it should never be your intention to default on mortgage payments, knowing that you have a safety net can save a lot of stress and worry.
- Individuals with poor credit history can still get a mortgage with the support of a guarantor
- Guarantors can work well for borrowers that have a good credit history but don’t have a large deposit.
- A mortgage guarantor can also be beneficial for those who may have difficulty proving their income such as newly self-employed people, or those who have a bad credit history.
- For the guarantor, it can provide peace of mind in knowing that their loved one’s home is protected if they are unable to meet their repayments.
Risks Associated With Using A Mortgage Guarantor
While a guarantor arrangement can help people with bad credit or small deposits to get a home loan, there are some risks involved that all parties need to be aware of.
- If the borrower defaults on their loan, the guarantor will be liable for the outstanding debt. This can put a strain on their finances and may damage their credit rating.
- Should the guarantor’s home, savings, credit rating, or personal finances be negatively impacted by your failure to pay back the loan, this could put a significant strain on your relationship.
- If your guarantor dies or becomes unable to pay the loan on your behalf, you will still be responsible for repaying the loan.
- If the property is sold at a loss (negative equity), and any outstanding mortgage can’t be covered by the sale, the guarantor may be required to make up the difference.
Qualities Of A Good Mortgage Guarantor
Whilst anyone can in theory act as a guarantor, certain qualities make individuals more suited to the role.
To be a good mortgage guarantor candidate, an individual should;
- have a good credit score and a steady income
- be someone who the borrower trusts
- be willing and able to take on the financial responsibility for another person’s loan.
- be financially stable and has a good relationship with the borrower.
- be able to provide collateral, such as their own property or savings as security, to cover the full amount of the loan in case of default.
While a guarantor can help increase the chances of loan approval, it’s important to remember that there are risks involved for both the borrower and the guarantor. Be sure to weigh up all the pros and cons before entering into such an arrangement.
How Much Can You Borrow With A Guarantor Mortgage?
The amount you can borrow with a guarantor mortgage will depend on several factors, including the income and credit score of both the borrower and the guarantor. The lender will also consider the value of the property being purchased and the loan-to-value ratio.
In general, you can expect to borrow up to 95% of the property value with a guarantor mortgage. This means that you will need to have a deposit of at least 5% of the purchase price.
If you are looking to borrow a larger amount, you may need to consider alternative options such as joint home loans or family equity release schemes.
Which Lenders Offer Guarantor Mortgages?
In today’s economy, it can be difficult to qualify for a loan on your own. That’s why many lenders are now willing to accept guarantors who can assure that the loan will be paid even if the borrower defaults on their payments.
So if you’re having trouble qualifying for a mortgage on your own, ask your mortgage lender if they would be willing to accept a guarantor. Chances are, they will be open to the idea and you’ll be one step closer to getting the money you need.
As there are plenty of High Street and Internet lenders willing to accept guarantors on mortgage applications, it’s important to shop around and compare offers before choosing one.
In general, guarantor loans tend to have higher interest rates than traditional loans, so it’s important to consider the total cost of the loan before signing up, and only approach lenders who are regulated by the financial conduct authority.
What Happens When You Miss A Mortgage Payment?
If you miss a mortgage payment, your guarantor will be required to make the payment on your behalf which could put an unexpected strain on their finances and may damage their credit rating.
In some cases, the lender may also require the guarantor to provide additional collateral to cover the outstanding debt. If the guarantor is unable to do this, they may be forced to sell their property or assets to cover the cost of the loan.
It’s important to remember that as the borrower, you are ultimately responsible for repaying the loan. This means that if you miss a payment, you could put your guarantor’s financial stability at risk. To avoid this, it’s important to make sure that you can afford the loan repayments before taking out a guarantor mortgage.
What Are The Alternatives To A Guarantor Mortgage?
If you’re having trouble qualifying for a loan on your own, there are a few alternatives to consider, such as joint home loans, saving up a bigger deposit, lenders with less strict criteria, or family equity release schemes. Each option has its own advantages and disadvantages so it is important to speak to a financial advisor to determine which option is best for you.
- Joint home loans involve taking out a mortgage with another person, such as a spouse, partner or friend. This can help to increase the amount you can borrow and may improve your chances of loan approval.
- Family equity release schemes involve borrowing against the value of your property with the help of a family member who agrees to act as a guarantor. This can be a good option if you have bad credit or no deposit, but it’s important to remember that you will be putting your family member’s finances at risk if you default on the loan.
- If you can put down a larger cash deposit, which can offset the risk of default, it will be more likely that you’ll be approved for a loan. This option typically requires more upfront planning and preparation, but it can be a good way to get the home loan you need without involving someone else in your financial affairs.
- Another option is to get a traditional mortgage from a lender who is willing to overlook poor credit history. There are plenty of regulated niche lenders available, but they often come with higher interest payments on their mortgage products.
If you are in any doubt about the right kind of mortgage to get based on your circumstances, you should consult the services of a whole market mortgage broker. They will be able to assess your needs, and financial situation, and advise you on the best lenders to approach with the best chance of acceptance.
How Does A Guarantor Mortgage Work?
A guarantor mortgage works by using someone else’s property as security for the lender in case you can’t make your repayments. This means that the lender decides whether or not to give you the mortgage based on their assessment of the guarantor’s ability to make the repayments, rather than your own ability, as would be the case with a traditional mortgage. If you do default on your payments, the lender can then pursue the guarantor for the money.
If you’re having trouble getting approved for a mortgage, finding a guarantor may be the best option for you. This article has explained what a mortgage guarantor is, how they can strengthen a mortgage application and the pros and cons.
To recap, a guarantor can help increase your chances of loan approval, but there are risks involved for both the borrower and the guarantor. Be sure to weigh up all the pros and cons, always compare offers from different lenders and only borrow an amount that you can afford to repay.
This article is for general information only and is not intended to be advice for your specific situation. You should always seek personalised financial advice and independent legal advice when taking out a mortgage or acting as a guarantor.