Also known as the family-assisted mortgage, a guarantor mortgage is ideal for people who want to buy a property but do not have enough funds to do so. They may have a very small deposit or low income which means they wouldn’t otherwise be able to secure a mortgage themselves. Instead, a guarantor, usually a family member or close friend, agrees to take on the mortgage repayments in case the homeowner is unable to do so for any reason. This means that the guarantor is legally liable for the mortgage repayments.
Guarantor mortgages work slightly differently from other types of mortgages because a mortgage lender will usually secure a legal charge on the guarantor’s property or savings even though they don’t own any share or percentage in the property. They are responsible for any defaults on the mortgage repayments, and it is their finances and credit score that are assessed when applying for the mortgage. As such, mortgage lenders usually require a guarantor to own most of their home outright and have enough savings and income to pay off the mortgage if necessary. This means they could risk losing their home if the homeowner fails to pay.
A number of mortgage lenders such as Virgin Money, Halifax, and Lloyds TSB stopped offering guarantor mortgages due to a lack of demand. Instead, Lloyds TSB has a “Lend a Hand” mortgage which allows family members to help people buy their first home by putting down a deposit of 10%. Similarly, Halifax has a “Family Boost” mortgage which offers exactly the same benefits. In addition, the government has introduced and extended access to the Mortgage Guarantee Scheme (until 31st December 2023) which gives first-time buyers help onto the property ladder by offering mortgages of up to 95% loan to value. Many mortgage lenders in the UK are part of this scheme.
The guarantor mortgage sounds like a good deal for the homeowner, but carries a number of risks for the guarantor, which is probably why many banks find that there is a lack of demand. For the guarantor, if the homeowner defaults on mortgage payments, this could affect their credit score which has an impact on whether they are able to take out loans, credit cards, or mortgages themselves. If the mortgage is secured to the guarantor’s savings, this means that those savings will not be accessible until the mortgage has been fully repaid, which restricts any plans the guarantor has for those funds. Due to the risks involved in this type of mortgage, some lenders like Nationwide ask that guarantors get independent advice and that a solicitor signs a document confirming the individual has sought this advice.
With this said, there is a good chance that family and friends are more comfortable with gifting money to loved ones rather than putting their homes and savings on the line. Perhaps the guarantor mortgage is becoming more redundant with new mortgage products and government schemes available to help people buy their first home through means that are not so risky for the guarantor.
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