Guarantor Mortgage
What is a Guarantor Mortgage?
Simply put a Guarantor Mortgage relies on a third party to be liable for any default on the mortgage payment from the borrowers. This means that the borrowers need to be trusted by the Guarantor and is usually a relative with good equity.
As securing a mortgage these days is harder than it used to be, especially for first time buyers to get a conventional mortgage, a guarantor mortgage may be the best solution. This helps first time buyers that might not be able to afford the deposit which, is usually around 5% to 10% of the value of the house and may very well put home ownership out of the question, the guarantor mortgage may be a good option.
Is this good for first time buyers then?
Yes, because many first time buyers are finding it increasingly difficult to get a conventional mortgage and afford the deposit which is usually around 5% to 10% of the value of the house which is putting home ownership out of their reach so they are unable to get on to the property ladder.
Who would act as Guarantor?
The guarantor mortgage is a mortgage whereby parents, close relatives or a longstanding friend can act as guarantors to the mortgage if they are able to afford to repay the loan. The parents, close relatives or friend can then hold the mortgage in the buyers name, acting as guarantor. The guarantor does not have to part with any money unless the buyer fails to make repayments. If this occurs then the guarantor is responsible to cover the repayments. The buyer could also borrow more money by combining their income with the guarantor's income and with this help could afford to get on the property ladder and afford a better property.
Good for graduates and young professionals?
Guarantor mortgages can also be ideal for graduates and some banks offer loans on the prospect of rising income in the years to come and they aim their marketing at young professionals. With the current economic climate, there are a variety of guarantor mortgages available including 100% loan guarantor mortgages which are fixed and some specify that a guarantor need only prove they can cover the shortfall, while others stipulate the full amount. As an example a trainee professional on a salary of £25,000 could borrow £100,000, and if the property they wish to buy is £145,000 some guarantor mortgages may require the parents to pledge all the costs, whereas others may only require the £45,000 excess to be covered.
This type of mortgage is also particularly popular with students whose parents buy the property as a buy-to-let then their son or daughter could then rent out rooms and the revenue generated should pay the mortgage.
Guarantor mortgages are also ideal for young graduates and some Banks offer loans on the prospect of rising income in the years to come and they aim their marketing at young professionals.
The good thing about guarantor mortgages is that you get on to the property ladder easily and quickly and you take full control of the mortgage at any time.
Any risks to the Guarantor?
The risk for the Guarantor is that if you fail to make any mortgage repayments the Guarantor has to make your repayments, so this could put the Guarantor under financial risk themselves, so its important that you can afford your monthly repayments. Also the Guarantor should be under 60 and may be restricted from buying any other properties.
The benefit of being a Guarantor is that it avoids certain tax liabilities compared with joint ownership as its on paper only so it cant attract Capital Gains Tax and also will not count as an asset for the purpose of Inheritance tax.