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A guarantor mortgage (also known as a no deposit mortgage) can help those that would otherwise be unable to buy a house by requiring someone to act as a guarantor for you. Parents and family members are common choices. Whoever agrees to be your guarantor will have to put up their property or savings as security.
Guarantor mortgages are designed to help those who either do not have a good enough credit score to obtain a mortgage on their own or lack the normal 5% minimum deposit. While this can include people who have a poor credit history, it can also be applied to those who are too young to have built up a sufficient credit score – for example, parents may want to secure a guarantor mortgage for their child who is only just 18 or has never used credit before.
Guarantor mortgages might be suitable for:
Can first-time buyers get a 100% mortgage? Yes, there are some mortgages available for first-time buyers, which don’t require the borrower to put up a deposit. There aren’t many, but they do exist! There are certain advantages to no-deposit mortgages, most prominently the fact that you’d be able to buy your first home without having to hand over a whole lot of cash upfront. Your savings can then be used towards other costs, such as moving, renovations and furniture.
This type of guarantor mortgage sees a family member place their cash savings into a savings account that is linked to your mortgage. The savings balance is deducted from your mortgage, reducing the amount of interest you pay.
The family member depositing the money will (as long as the mortgage is paid) get their money back eventually. However, usually they will not have earned any savings interest, and they may not be able to access their funds for a pre-agreed number of years or until the outstanding mortgage balance reaches a set of the property.
If the property is repossessed, the lender will sell the property to recover the value of the mortgage and, if this sold at an amount lower than the mortgage, they could recoup any difference from the guarantor’s savings. Providers offering family offset mortgages include Vernon Building Society and Family Building Society.
There is a risk to borrowers that if property prices fall, they could owe more than 100% of its value. This is known as being in negative equity. This is a problem, but only if you are considering remortgaging or moving home (assuming you can keep up the regular monthly repayments). As most lenders will be reluctant to let anyone with negative equity switch to a new deal, you will likely end up on your lender’s standard variable rate. One way to get out of this is to overpay your mortgage. However, not everyone can afford to do this.
If you still remain in financial difficulty, then a lender might choose to:
As you can see, failing to meet your guarantor mortgage repayments not only has serious ramifications for you, but also those acting as your guarantors.
If you’re considering taking out a mortgage without using a deposit, you may not have much in the way of savings, so it’s important to understand all the costs associated with buying a home, making sure you can meet them. It is impossible to list all the costs you may have to meet as these are likely to vary, but there are some general things to keep in mind.
Given their status as mortgages for those who don’t have any other option, it’s not surprising to find that 100% mortgage products tend to come with higher interest rates and fees than other mortgage types. Those with a lack of savings should also remember that there will still be other costs to pay upfront, such as stamp duty and conveyancing fees for those moving. There may also be early repayment charges to pay for those remortgaging.
While it’s important to compare the few 100% mortgages available to make sure you are getting the best possible deal, it may be a good idea to also look at alternatives. If you are a homeowner who’s lost some of the value in their home, you may be able to remortgage to a higher-LTV mortgage that is still below 100%. Likewise, first-time buyers without someone to act as their guarantor will have to stump up a 5% deposit but will also be able to get much better deals as a result.
For those with family members that are willing to help their loved ones get on the property ladder in any way possible, there’s another option. That savings pot they are happy to put up as collateral may also be used as a gifted deposit to help get a more competitive deal. Some may even use equity release to help their children get together a decent deposit.
There are a few things to watch out for when gifting a deposit, however. You will need to follow the correct procedure and be able to show that the help is a gift, not a loan. This will likely require the help of a solicitor, so don’t wait too long to ask for advice and arrange things, or your property purchase might get delayed or even entirely derailed.
For those without generous benefactors, there’s always the Lifetime ISA schemes to consider. This can allow you to save up for that deposit a bit faster thanks to a Government bonus of 25%. They do come with restrictions, though, so remember to read up on them before committing.
To be a guarantor you must:
As the guarantor’s home or savings are put up as collateral against the loan, the biggest risk for a guarantor would be losing their home or savings if the main borrower does not meet their obligations. This is why it’s really important that you weigh up your options before agreeing to become a guarantor for someone, whether you're a parent, a family friend or similar.
If you're still not sure what kind of mortgage is right for you, you could consider using a mortgage broker. Not only can they provide valuable advice, but they may also have access to 100% LTV mortgage deals that are not available directly on the Moneyfacts charts.
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