Guarantor mortgages involve a third party, usually a family member, who agrees to cover mortgage payments if the borrower cannot. This arrangement helps individuals with limited credit history or lower income secure a mortgage. The guarantor’s own assets or income act as security, reducing risk for the lender and potentially offering more favourable terms for the borrower.
Purpose and eligibility
A guarantor mortgage enables borrowers with little or no deposit to access the property market. In this type of mortgage, a guarantor, typically a parent or close family member, provides security for the loan. If the borrower fails to make mortgage payments, the guarantor is responsible for covering the outstanding debt.
Benefits for first-time buyers
Guarantor mortgages are beneficial for first-time buyers who struggle to save up for a deposit. They allow borrowers to secure a larger loan than they would qualify for on their own, enabling them to purchase properties in areas that may have otherwise been unaffordable.
Types of guarantor mortgages
There are two types of guarantor mortgages.
Limited guarantor mortgages restrict the guarantor’s liability to a specific percentage of the loan amount. Unlimited guarantor mortgages make the guarantor liable for the entire loan if the borrower defaults.
Credit rating and self-employment advantages
Guarantor mortgages can be useful for borrowers with low credit scores, as the guarantor’s good credit rating can help secure a more favourable interest rate. They can also benefit self-employed borrowers who may not meet traditional employment and income criteria.
Risks and considerations
Guarantor mortgages involve risks for both the borrower and the guarantor. The guarantor puts their own financial stability at risk by guaranteeing the loan. Defaults on payments can negatively impact both the borrower’s and guarantor’s credit scores, making it challenging to obtain future loans or mortgages.
Qualification and criteria
To qualify for a guarantor mortgage, both the borrower and the guarantor need to meet the lender’s eligibility criteria. This typically includes a credit check, affordability assessment, and providing proof of income and assets by the guarantor.