Guarantor Mortgage

Guarantor Mortgages

If you are struggling to get on the property ladder as a result of insufficient income or deposit funds, then approaching the bank of mum and dad may provide you with additional borrowing power.

Guarantors are typically your parents, but this can extend to grandparents as well. By joining forces with a parent, it will provide you more buying options. However, in the event of you not being able to pay your mortgage, then your guarantor will step in to pick up the tab. This is why a guarantor mortgage requires serious consideration and due diligence. It’s not for everyone.

Before proceeding down the guarantor mortgage route, bear in mind the following:

  • The main objective of a guarantor mortgage is to help you to get on the property ladder. As your career and income prospects improve over time, you will be able to take over the mortgage in your sole name and therefore release your guarantor from the mortgage
  • A guarantor mortgage is not for people who have bad credit and need their parent to step in to get them a mortgage
  • Lenders take a holistic view on all the parties involved, i.e., incomes, credit status, existing assets, and liabilities
  • The lender will expect you to be able to afford the mortgage payments on your own income
  • Your guarantor will need to seek independent legal advice, hence, additional legal costs
  • Some lenders will base the term of the mortgage on the guarantor’s age, making the mortgage unaffordable
  • In certain situations, it may not necessarily be a guarantor mortgage per se but a simple joint mortgage with a parent that can do the trick

 

It goes without saying that a guarantor mortgage requires specialist mortgage advice and you are better off approaching an independent whole of market mortgage adviser that has access to and knowledge of the various guarantor and bespoke mortgage deals currently available. These are some of the guarantor products currently available:

Aldermore Bank: Family Guarantee Mortgage

Aldermore will lend you 100% of the purchase price. Therefore, you don’t need a deposit.

Aldermore will take a charge on the guarantor’s residential home. The product is available for first time buyers and home movers.

For example, assuming you are looking to buy a property for £175,000.

Your guarantor’s property is valued at £500,000 with a mortgage of £75,000.

Aldermore will put a charge equal to 25% of the value of the purchase price, i.e., £43,750, on the guarantor’s residence.

As such, total debt on guarantor’s residential is now £75,000 + £43,750 = £118,750.

Total debt on both assets cannot exceed 75% LTV.

In this example, its £118,750 + £175,000 = £318,750 on total value of £500,000 + £175,000 = £675,000.

£318,750 / £675,000 = 47% LTV

How much they lend you is based solely on your income (not your guarantor’s) and they will conduct a stress test to ensure that you can afford the mortgage.

 

Bath Building Society: 100% Parental Assistance Mortgage Scheme (PAMS)

Bath Building Society (BBS) can lend you up to 100% of the purchase price depending on your income. They will then take a charge of up to 25% of the purchase price. The total debt on the guarantor’s property (existing mortgage and lenders charge) cannot exceed 65% of the property’s value. The product is available primarily for first time buyers in England and Wales.

 

Vernon Building Society: Family Assist Mortgage

They will lend up to 100% of the purchase price, provided a family member can deposit 20% of the purchase price with the bank for a period of four years. The family member cannot withdraw their savings during the period nor do they earn any interest. The savings are offset against the mortgage balance, which means you pay less interest. After four years, provided the mortgage is kept up to date, the family member is free to withdraw their cash. This is not a typical guarantor product in that the family member is not responsible for the mortgage in the event of a default by the borrower. All they stand to lose is their savings. The biggest drawback is that they only lend on properties within a 25 mile radius of their headquarters at 19 St Petersgate, Stockport. SKI 1HF.

 

Market Harborough Building Society: Family Support Mortgages

Market Harborough have a variety of innovative and flexible products designed to assist first time buyers and the different requirements of guarantors, i.e., from cash on deposit products, joint mortgage products to a charge placed on the guarantor’s property. Maximum LTV is 95%.

 

Family Building Society (part of National Counties Building Society)

The Family Building Society has developed a 95% LTV mortgage product that allows parents, grandparents, and relatives to pool their financial resources together in order to assist their younger family members to purchase a property.

Family members can utilise cash or the existing equity in their homes as the deposit required for the younger members to get on the property ladder. The mortgage can be structured as follows:

Family cash deposit: Purchase price is £200,000. You put down 5% deposit: £10,000.

Parents, grandparents, relatives (family members) collectively contribute 20% in cash (£40,000). Family member’s cash is deposited in a savings account with the bank for a period of 10 years.

Total deposit is 5% = £10,000 and you obtain a mortgage of £190,000 (95% LTV) but at a more favourable rate due to the 20% deposited in a saving account by your family members. (For example, at the time of writing they have a competitive 3 year fixed rate at 3.99%, available at 95% LTV. Please note that lenders can withdraw rates at any time.)

At the end of 10 years, provided you have made all your mortgage payments, your family members can access their savings.

Equity arrangement: purchase price is £200,000. You deposit 5% deposit: £10,000.

This is for parents that do not have access to large amounts of cash but have plenty of equity in their home. As such, the bank puts a charge of £40,000 (20%). Bank then lends you £190,000 (95% LTV) but at a more favourable rate than a standard 95% mortgage rate. Parents do not have to part with any physical cash.

Charge remains on parent’s property for a period of 10 years. Parents are liable for any losses incurred by the bank if the property is sold for less than the original mortgage amount.

Family Offset account: purchase price is £200,000. You deposit 5% deposit: £10,000.

Parents agree to deposit £40,000 in an offset savings account with the bank. Parents receive no interest on their £40,000 savings as it is used to offset interest on your mortgage. Therefore, you borrowed £190,000 but you only pay interest on £190,000 minus £40,000 = £150,000.

After 10 years, your parents can pull out their cash. In all these examples, once the funds are pulled out, the mortgage cost will increase; therefore, you need to ensure you can cover the increased mortgage costs. Basically, the bank is giving you 10 years to get your finances and career in a much better position so that you no longer need the bank of family members.  By year 10, your circumstances should have changed: better job, higher basic salary, and fingers crossed, the property may have increased in value, thus allowing you to refinance and relieve your family member from their financial commitment. Why tie up your family member’s cash/equity for 10 years; could it be done sooner?

A lot of thought has to be taken with your family member(s) before going down this route. Family Building Society has sought to provide a few options to cater for different family set-ups. This is an innovative product designed to assist first time buyers and, fingers crossed, we will see more lenders launching similar products.

 

Woolwich’s Family Springboard Mortgages

Available up to 95% LTV, provided a family member can deposit 10% of the purchase price in a savings account. This product was a good idea when it was launched but the government’s Help to Buy scheme has resulted in more lenders offering 95% LTV products without the need for a parent/guarantor to forfeit some of their hard earned cash. However, their Helpful Start Mortgages allows first time buyers to buy jointly with a parent and, as a result increase their borrowing options.

 

Bespoke Mortgage products

This is where a lender offers a bespoke product based on client’s overall income and assets. For example, a first time buyer buys jointly with father. Lender bases term on child’s age to ensure mortgage is affordable. In addition, both applicants are on the mortgage but the father may not be on the title deeds. These are specialist products offered through a number of niche lenders and primarily arranged through specialist independent whole of market mortgage brokers.

If you are contemplating going down the guarantor route then it goes without saying that you will need the services of an experienced mortgage broker who will be able to source and advise you on the best mortgage option available that meets your specific requirements.

 

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

 

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