It’s not an easy time to be a first-time buyer.
House prices continue their inexorable rise, while lenders have been ordered to tighten up their mortgage application process, putting would-be borrowers through the ringer before consenting to lend to them, as a result of new rules courtesy of the Mortgage Market Review.
To make matters worse, guarantor mortgages – a helping hand which has helped plenty of homebuyers to take that first step onto the housing ladder – appear to be going the way of the Dodo.
What are guarantor mortgages?
With a guarantor mortgage, a close relative (such as a parent) acts as a guarantor on the loan. That means that should you fall into difficulty meeting your repayments, the lender can pursue the guarantor for the outstanding debt.
These deals are popular with young people looking to buy their first home as it means they may be able to borrow more than if they applied for a standard mortgage, as the guarantor’s income is taken into account.
The obvious downside is the guarantor is putting themselves into a position where they could be pursued for their loved one’s debt.
The guarantor can be removed from the mortgage at a later date, once it has been established that the borrower is comfortable covering the full cost of the repayments themselves.
The lenders that offer guarantor mortgages
Borrowers looking to take advantage of guarantor deals now have a much smaller pool to choose from, after Newcastle Building Society confirmed it was scrapping guarantor deals this week. It follows Royal Bank of Scotland and NatWest, who dumped the guarantor option back in April.
One lender that will consider guarantor applications is Virgin Money. It insists on the guarantor being a blood relative of the main borrower, and wants justification as to why a guarantor is needed. Examples of acceptable reasons include:
- the buyer is a young professional who is likely to have a quick increase in salary within a few years and so will be able to support the mortgage in the long term;
- for business reasons, a self-employed person wants to act as guarantor for their spouse or partner.
Meanwhile Market Harborough Building Society offers a Family Pledge mortgage, where the parents act as guarantor on the mortgage and promise to step in should the mortgage payments not be met.
Guarantor by a different name
Some lenders offer types of mortgage which, while they aren’t exactly a guarantor mortgage in the traditional sense, do involve a parent taking on some responsibility with the loan.
[SPOTLIGHT]Aldermore Mortgages offers a Family Guarantee mortgage, which is designed for first- or second-time buyers who have little or no deposit and allows Aldermore to offer mortgages of up to 100% of the property’s value.
The parent offers a guarantee for the mortgage amount above 75% loan-to-value (LTV). So for example if I am buying a property worth £200,000 with a 100% LTV mortgage, my guarantor would have to guarantee the final £50,000 of the loan. The guarantee takes the form of a charge on the guarantor’s own property and is capped, so it won’t increase in size over time. The maximum guarantee period is 10 years.
Guarantors won’t be pursued in the event of arrears, but they will be liable for any shortfall if the property is repossessed and sold, up to the maximum amount of the guarantee.
Similar schemes are in place at lenders like Bath Building Society, Market Harborough Building Society, and National Counties Building Society.
Then there’s the Woolwich Family Springboard Mortgage, where Woolwich will lend at up to 95% LTV, so long as the parent puts savings worth 10% of the house price into a Helpful Start savings account. After three years the savings account is closed and the parent is given back their money (plus interest), so long as the borrower has kept up to date with their repayments.
Clearly, going for a guarantor mortgage is a more complicated process than going for a traditional mortgage. So getting some decent, independent advice can make a big difference. Head to our mortgage centre, where you can speak to independent mortgage brokers about your options, as well as consider the deals available to you.
Have you got a guarantor mortgage? Have you acted as a guarantor for a loved one? Tell us about your experiences in the Comments box below.
This article aims to give information, not advice. Always do your own research and/or seek out advice from a regulated broker, before acting on anything contained in this article.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
Thanks to David Hollingworth of London & Country Mortgages for his help with this article