More and more, those who are looking to get on the housing market are finding it harder to put together the deposit and get accepted for a mortgage. With stricter rules on lending, it can be a minefield for first time buyers to navigate. Acting as a guarantor can help someone get on the housing market. The aim is to provide the security to the lender that ensures, if any problems occur, you’ll be there to help out and cover the losses. Parents nowadays will often act as guarantors for their children so that they can afford to buy their own home. This approach, however, doesn’t come without its risks.
A guarantor mortgage is a legal agreement. The guarantor does not own a share of your property, nor are they one of the named people on the title deeds. They agree basically to make payments if you should fall behind on your mortgage and they put something up as collateral – their own home or savings that are placed into an account held by the lending company.
A guarantor is generally used if, for example, you can’t get together the deposit for the mortgage loan, you have a low income that doesn’t meet the current stringent acceptance guidelines or you have a poor credit score which causes concern.
Anyone can be a guarantor but most mortgage companies put a limit on who you can choose – generally a family member. If you are acting as a guarantor, of course, you will need to demonstrate that you can repay any shortfall, should it occur. This could mean:
- You own your own property or have enough collateral that can be accessed to make a repayment on the mortgage.
- Your income is high enough to comfortably cover any shortfall.
- You have a respectable credit history and no record of getting into financial difficulties.
Many lenders will also want to ensure that you have taken the right legal advice before agreeing to accept any guarantor status.
The building society or mortgage lender can take action against the guarantor if the home buyer fails to keep up with payments or defaults on the mortgage. This could mean, in exceptional circumstances, that the guarantor is liable for the full repayment of the mortgage. A guarantor can be removed from the mortgage once it has been established to the lenders satisfaction that the property holder can comfortably cover the payments.
While this is seen as a good way for new buyers to get on the market, the pool of guarantor mortgages is gradually decreasing. In some cases, mortgage providers will ask for a guarantee for the full amount, in others they are looking for the guarantor to cover the deposit. Guarantors aren’t normally chased straight away when someone falls behind in payment – the liability usually comes when the home is repossessed and sold at which point the guarantor will need to pay the shortfall.
Opting for a guarantor mortgage is a little more complicated than applying for a traditional one and you should always get legal advice and consider all the consequences before you sign any agreement.