With property prices at their current level, many first time buyers are struggling to get a foot on the property ladder. According to the Halifax the average price paid by first time buyers was £137,122 in 2005.
Guarantor mortgages – why are they needed?
The Council of Mortgage Lenders (CML) says that first time buyers historically account for around 45-50% of house transactions, yet in the second quarter of 2005 this figure had dropped to 30%. The Halifax says that there were an estimated 320,000 first time buyers in 2005, the lowest since 1980. It also says that the average age of a first time buyer is now 33.
Many first time buyers are also struggling to save a deposit for their first house purchase. Research from the Halifax shows that the typical first time buyer takes five years to save a deposit. The solution may be 100% mortgages, but affordability is still an issue in many cases.
It is hardly surprising that young people are struggling to buy their first home. The National Union of Students says that the average student can expect to pay over £30,000 to graduate. This takes into account tuition fees and living costs. According to Bradford & Bingley, 46% of first time buyers have debts of over £8,000 before they buy a property and 16% owe £15,000 or more.
To be able to afford their first home, many buyers are turning to their family for financial help. Bradford & Bingley research shows that 42% of first time buyers get help from their parents when buying a home, of these, 15% use parents as a guarantor.
Guarantor mortgages – how they work
With a guarantor mortgage a parent or close family member can either cover the shortfall in the mortgage needed to cover the borrowers income or can cover the full mortgage amount. By covering the mortgage, or part of it, the guarantor is liable to make payments if the principal slips into arrears or defaults. For instance, if you earn £20,000 you could borrow £80,000. If the property you want to purchase is worth £130,000, there is a shortfall of £50,000 that the guarantor would cover. The mortgage lender will assess the guarantor's income, current mortgage and other financial commitments to ensure that they can cover the loan amount.
With guarantor mortgages a parent can hold a mortgage in their offspring's name. Once the young person's income increases, he or she can then take on full responsibility for the mortgage.
Many mortgage lenders now offer guarantor mortgages. As with any mortgage, it is important to compare rates, fees and other features. It is important that financial advice is taken before committing to a guarantor mortgage.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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