With house prices rising and UK incomes not keeping pace, many potential homebuyers do not have a big enough deposit or a high enough income to get a mortgage on their own. For some, asking someone to guarantee the mortgage may be the only route to approval.
Who is the guarantor?
The guarantor is usually a family member who already owns their own property and/or has substantial savings. It is a similar concept to a director’s guarantee, because another person is being asked to guarantee the loan. However, guarantors for residential mortgages are usually close family, often a parent of the borrower.
The benefits of a guarantor mortgage
A guarantor mortgage can help a buyer secure a property. Often the borrower knows they can afford the mortgage payments, but they need to give the lender extra reassurance. It can make the difference between buying a property that ticks all the boxes rather than one that is too small or in the wrong location. A guarantor mortgage may be needed simply because the borrower does not earn enough, or because they do not have a large enough deposit. First-time buyers and those with a poor credit rating are also among borrowers who might need a guarantor.
Potential issues in a guarantor mortgage
The guarantor needs to think carefully before they agree to commit. In many cases the guarantor will never be called on, and the borrower will make their mortgage payments without issue. However, there is a real chance that the guarantor will need to make the payments if the borrower cannot. This might only be for a month or two while the borrower gets their finances in order, but in some cases the guarantor may have to make ongoing payments. In the worst case, the guarantor’s own home could be at risk, although this is unusual.
The guarantor will be asked for evidence of their own income. They may also need to show that they could cover the mortgage if the borrower cannot. This can be shown through savings, or by using their own home as security.
Most people will ask a family member to be the guarantor, which has huge benefits. However, it can lead to disagreements down the line. Guarantors should only commit if they are genuinely willing and able to make the mortgage payments if necessary.
When to seek legal advice
It would be unwise to agree to a guarantor mortgage without legal advice, and many lenders require the guarantor to get independent legal advice before they sign. Using the services of an established firm such as https://www.parachutelaw.co.uk/director-guarantee Parachute Law helps all parties. Sometimes people make the mistake of not seeking legal advice simply because it’s an agreement between family members. However, that may be even more reason to do things properly.
Summary
A guarantor mortgage is sometimes the only way a buyer can secure a purchase, whether because of income, deposit or credit rating issues. It usually involves asking a family member to be the guarantor, who will need to show they could pay the loan if necessary. Always seek legal advice, whether you are the borrower or have been asked to be a guarantor.