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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. The guarantor would be required to put up their property or savings as security in lieu of a deposit by the borrower. Parents or other family members are common choices to act in this capacity.
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 get their money back eventually, as long as the mortgage is repaid. However, they may not be able to earn any savings interest on the amount deposited (if they can, the interest rate will typically be low) and they typically won’t be able to access their funds for a pre-agreed number of years, or until the outstanding mortgage balance reaches a set percentage of the property. If the property is repossessed, the lender will sell the property to recover the value of the mortgage and, if it’s sold at an amount lower than the mortgage, they could recoup any difference from the guarantor’s savings.
Providers offering family offset mortgages include Tipton & Cosely and Family Building Societies.
An alternative to asking a guarantor to put some of their savings in a linked savings account is putting a legal charge on their own property to act as collateral. For example, mortgage lenders may ask to secure 20% of the amount you’re asking to borrow against your guarantor’s property, provided the guarantor in question owns a substantial part of their home outright. The 100% LTV mortgage lender may impose a maximum combined LTV on the guarantor’s original mortgage and the new charge amount – this is likely to be around 65%. The charge will typically remain on the property until a certain percentage of the new mortgage has been paid off.
This form of guarantor mortgage can be a viable option for those who want to help family members but don’t have the cash to gift, particularly if they’ve got significant property assets.
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.
Being named as guarantor does not mean that they own a portion of the property. The name on the deeds will be that of the borrower only. In addition, being a guarantor does not mean that they have any right of access to the property the mortgage is secured against.
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’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.
To be a guarantor the individual 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 individuals weigh up their options before agreeing to become a guarantor for someone, whether a parent, a family friend or similar.
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, and they may want to look to the Help to Buy equity loan scheme as a chance to get a lower-LTV mortgage with only a 5% deposit.
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. It’s vital 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 scheme 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.
Joint Borrower Sole Proprietor (JBSP) mortgages are a more recent development that could offer an alternative to guarantor mortgages. Unlike traditional joint mortgages – which would see both parties be on the property deeds as well as the mortgage, which could cause stamp duty difficulties for parents who are already homeowners, for example, and would mean the first-time buyer doesn’t qualify for stamp duty relief – JBSP mortgages allow for several borrowers to be a part of the mortgage for the benefit of a single proprietor who lives in the house.
These mortgages are designed for parents or family members to help someone onto the property ladder without needing to put up their home or savings as collateral. Essentially, they’re not acting as a guarantor, but are part of the borrowing process in their own right, and accept joint responsibility for making mortgage payments.
All parties have their name added to the mortgage and will need to pass affordability assessments as standard, but crucially, they’ll have their income taken into account, which could be particularly beneficial for first-time buyers on a low income – it means they’re more likely to be accepted and could borrow more than they’d otherwise be able to. However, with this kind of mortgage a deposit will still be required, so it’s important to bear this in mind.
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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