Buying a home is everyone's dream. But obtaining a mortgage can be challenging for some people. Especially those with bad credit history. A mortgage guarantor could be the answer. But do banks accept guarantors for mortgages post the financial crisis?
find me a mortgageThe short answer is YES, most lenders still offer guarantor mortgages. These are special mortgages that provide a loan on the GUARANTEE that someone – usually a close relative – will cover the mortgage payments in the event the borrower can no longer afford them.
A guarantor mortgage essentially works the same as a conventional mortgage. The difference is that a guarantor is added to the mortgage agreement alongside the borrower.
The guarantor agrees to pay the mortgage repayments in the event the borrower can not. Along with guaranteeing repayments, they must also put up security if neither they nor the borrower can afford to keep up repayments.
The borrower is listed on the title deeds as the legal owner of the property. They are responsible for making regular mortgage payments. In the event they can no longer afford to pay, the guarantor is asked to make payments on their behalf.
The guarantor agrees to cover repayments should the borrower not be able to. Their name is added to the legal documents but they are not listed on the title deeds. They also have to put up some form of security in the event neither party can afford to pay.
Most lenders ask that the guarantor put their own property up as security. In most cases, they will expect the property to be mortgage-free. At the very least they will expect enough equity in the property to cover the cost of the guaranteed loan.
This may be unsatisfactory for some. Especially those with complex financial arrangements or retirees. In this case, some lenders will accept savings rather than property for security purposes. This can work in one of two ways.
Method 1 – The guarantor agrees to put cash into a savings account. The amount of cash required will depend on the size of the mortgage. The money cannot be removed from the account for the duration of the mortgage. But it will earn interest.
Method 2 – The guarantor pays money into an account linked to the mortgage. This has the advantage of making monthly repayments cheaper. However, no interest is earned on the savings and the money can only be withdrawn once the mortgage is fully paid off.
If you would like more information about which method is the right one for you. Contact our accountancy department for specialist advice.
Almost anyone can act as a guarantor if their credit history is good enough. But in reality, most lenders require that guarantors are related to the borrower. They can be parents, step-parents or siblings. But they must be a close family member.
Most lenders also require that the guarantor has fully paid off their mortgage. But some lenders will accept a guarantor that has enough equity in their own home to cover the cost of the guarantor mortgage.
In either case, they will need to have an impeccable credit history. And be able to show they have enough income to cover the payments of their mortgage and the guarantor mortgage.
Becoming a guarantor is a huge commitment with serious consequences in the event neither party can afford to pay. Anyone considering becoming a guarantor should therefore take appropriate legal advice before committing.
Guarantors that are also company directors or listed as self-employed should also consider taking out loss of income protection. This will provide cover in the event your income is disrupted due to circumstances outside your control.
Our insurace department can help ensure you have the right level of cover.
We are often asked do banks accept guarantors for mortgages? To which we answer. Yes, but do you need a guarantor?
Due to the serious consequences of defaulting on mortgage repayments. This type of mortgage should only be used as a last resort once all other lending sources have been exhausted.
For example; special zero fees mortgages are available for contractors which may be more suitable than a guarantor mortgage. We offer specialist advice for contractors. Get in touch with our mortgage advisors today for free advice by completing the form here.
We typically recommend guarantor mortgages in the following circumstances:
Other types of borrowers such as ex-pats, contractors, or company directors. Maybe better served by more specialist lending options.
In some cases having a guarantor can help secure a larger mortgage. For example, some lenders are prepared to loan up to 100% of the property value. This can help first-time buyers get on the property ladder without having to save a large deposit.
But it is important to remember that the borrower must be able to afford the monthly repayments. So a guarantor mortgage can help you borrow more upfront. But the borrower must still pass affordability checks.
You can find out how much you can comfortably afford to borrow by using our affordability calculator.
Most lenders expect the guarantor to remain on the mortgage for the entire term. Some lenders may allow another guarantor to be placed on the agreement. But they will have to pass the same stringent credit checks and provide property as security.
Alternatively, if the borrower's financial circumstances change such that they can afford a mortgage on their own. A remortgage can be taken out to replace the existing one. This will effectively remove the guarantor from the responsibility of covering payments.
If you are looking for a mortgage or are thinking about becoming a mortgage guarantor. You must seek the right legal and financial advice first.
WIS Mortgages are a specialist mortgage advisor in Kent, London, Essex, and Buckinghamshire. But we cover the whole of the UK online.
Our team of mortgage advisors are available to provide free mortgage advice for contractors, ex-pats and borrowers with bad credit history. Complete the contact form here to arrange a free consultation today.
As a mortgage is secured against your home/property it may be repossessed if you do not keep up with the mortgage repayments.
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