A mortgage guarantor can be a great help for those struggling to secure a house mortgage or even a mortgage for a buy to let investment property. But what exactly is a mortgage guarantor, and how does it work?
In this article, we will be going over how a person can agree to sign up to this type of agreement and who is eligible to pay what in certain situations. As you can imagine, the failure to pay can result in a lot of stress if you don’t know what you’re doing so it is vital to understand becoming a mortgage guarantor in detail before applying.
So, whether you’re a potential mortgage guarantor looking for the details, a buyer looking to see how they can improve their mortgage application or you’re simply just curious, read on for a full breakdown on the topic.
How does a guarantor mortgage work?
In simple terms, a mortgage guarantor is someone who is involved in the same contract for a mortgage who will cover mortgage payments in the event that the person who originally took out the loan falls into arrears.
The mortgage guarantor is eligible to cover the loan for as long as the mortgage is in place so they could end up paying off a mortgage that isn’t theirs for years or decades.
However, in cases like this, it is likely the mortgage guarantor will ask the mortgage owner to give their property back to the bank at a loss so they don’t have to keep making payments for something it is clear the buyer cannot afford.
In order to get a mortgage guarantor to work, the first step is to find a guarantor who can be a close friend, family member or someone you know but you trust and write their name as a guarantor on the mortgage application with their consent.
Most banks will inform you about the option to use a guarantor as it may be a recommendation from them after they have conducted a mortgage capacity report or produced a mortgage in principle.
What are the potential risks involved in a guarantor mortgage?
Being a mortgage guarantor comes with a significant amount of risk financially as the guarantor will have to cover the mortgage payments for a loan no matter what.
There are a lot of unexpected things that can happen throughout the duration of buying a house and paying off the mortgage payments and certain scenarios are impossible to plan ahead for.
As a result, someone who is a mortgage guarantor may end up with poor credit if they cannot afford mortgage payments if they have to cover payments for multiple months.
This can impact the guarantor’s ability to take out their own loan in the future and potentially impact their own ability to buy a house.
As well as having poor credit, the guarantor may suffer an extreme financial loss if they have to pay back the majority of a mortgage. This is a worst case scenario that impacts the guarantor’s ability to plan ahead financially.
For instance, if the owner of the mortgage has an extreme illness and is no longer able to work, the mortgage guarantor may have to cover payments for many years until the mortgage can be paid again.
In addition, the mortgage guarantor also has to consider the personal relationship they have with the owner of the mortgage. Typically, in order to find a guarantor, a home buyer will turn to friends and family.
This means there is a relationship that is reliant on the mortgage payments being made and if either party runs into financial difficulty, this could spell the end of a great relationship.
Finally, there is a risk that the mortgage guarantor is taking on that prevents them from taking out any more loan themself. Any loan application will show that they are a guarantor on another mortgage.
If the guarantor runs into their own emergency and needs finance for their own set of reasons, this can be troublesome and result in them potentially having to find a loan guarantor themself too.
who can be a mortgage guarantor
Anyone can be a mortgage guarantor, it depends on the requirements for the lender and what rules they want to put in place to help mitigate risk on their end of the deal.
For instance, some lenders will state a guarantor has to be one that has covered at least 50% of their own mortgage whereas others will state that the guarantor has to have no other mortgage they are paying off.
Also, it may be the case that a mortgage lender will not allow someone to become a mortgage guarantor if their income is below a certain threshold or their credit is not up to scratch.
All of these factors determine who can be a mortgage guarantor but if the guarantor looks around and asks a lot of lenders, there is a good chance someone with a decent income and some good credit will be able to cover the loan
Do guarantors get a credit check?
Yes, a mortgage guarantor will be subject to very similar testing as the person taking out the original loan. This includes a full credit check of their payment history.
In a check like this, the credit and debit card accounts of the guarantor will be scrutinised and the amount of debt the guarantor has already will be looked into. Even simple things like if the guarantor is registered to vote is assessed.
At the end of a credit check, the lender will have a good idea of the credit report of the guarantor and if they can afford to cover the loan in the event that something were to go wrong. Perfect for making a decision.
Does the guarantor need to be a homeowner?
You do not need to be a homeowner to become a guarantor but being a homeowner may help you apply to become a mortgage guarantor in the first place.
It all depends on the terms of the lender and the requirements they have for guarantors. However, in general being a homeowner shows that you’re able to pay off debt and manage money responsibly so it is a good sign.
If a guarantor is on their way to becoming a homeowner by being in the process of paying off a mortgage then this also counts as a good sign to a lender. However, again, each lender is different with their own requirements.
Who can get a guarantor mortgage?
Anyone who is applying for a house mortgage can get a mortgage guarantor as long as the lender requires one. It is typical for those who are younger buyers who don’t have the correct credit check and years of earning an income to need one.
This credit check is the biggest factor in determining who needs a guarantor. Mortgage lenders are unlikely to approve an application at all if there is no solid proof of a good income.
Most people fall short in proving to the bank that they have the right history and responsibility to pay off a mortgage for decades and shows that they aren’t a risky buyer. Having a guarantor helps them do so.
Another big reason for someone needing a guarantor is if they cannot save the right amount of money for a deposit. In this case, the buyer may be able to get approval for a mortgage with no or very little deposit.
In cases like this, the assets of the mortgage guarantor will act as the deposit for the loan. In the event the buyer cannot make a mortgage payment, the assets of the original home of the guarantor will be seized.
This is why it is important for a guarantor to assess if the role is right for them. Their own financial situation can be compromised if the mortgage owner cannot make payments for a long time.
Who are guarantor mortgages suitable for?
Guarantor mortgages are suitable for those who usually meet one of three criteria:
- They have a poor credit score but have the right deposit and income
- They have the right income but don’t have the right deposit
- They have a credit check that doesn’t have a lot of history
As a result, it is usually not suitable for someone who is struggling to gain approval simply for being underprepared in their application. Usually bigger more unavoidable situations are required.
Someone who is seriously considering a mortgage who is able to improve their income before they apply, may be better off not adding this risk to a guarantor as a result.
Especially when a guarantor involves a personal relationship and could harm the financial future of a close friend or family.
Nonetheless, all situations are different and it could be necessary in order to move forward in the right time frame and it could be the right decision to make the most of a property opportunity that will not be around forever.
How much can be borrowed through a mortgage with a guarantor?
There is no cash amount that can be borrowed with a guarantor as opposed to without one. Borrowing just becomes a lot easier and you’ll be able to borrow up to 100% of the mortgage loan without the deposit.
This doesn’t have to be the case though and a borrower can still have a normal LTV ratio that is typical of a residential mortgage if they want to. The guarantor just becomes an insurance to make payments in this case.
In order to borrow up to 100% of the mortgage, the guarantor will have to use their own assets as the deposit for the mortgage. For example, they could put some money in an account set up especially for the guarantor process.
Or they could give the bank permission to take their assets as a contribution towards the value of the home in the event the bank has to repossess a property due to not being able to make the mortgage payments.
All in all, the answer is always, more than before. If a buyer is only able to borrow 75% of the mortgage before, with a guarantor this figure is likely to be more at perhaps 80% or 85%.
However, the cutoff for the lowest deposit is usually 5% like in a 95% mortgage.
It all depends on what the mortgage owner actually wants, what level of risk the guarantor is willing to take on as well as the financial situation of the guarantor to benign with.
Does the guarantor own the property?
No, the mortgage guarantor does not own the property they are guaranteeing the loan for. However, it could be the case that they have an agreement set up privately with the borrower.
This could look like taking a certain split of the value of the property if they choose to sell it on in the future or perhaps taking a cut of the rental payment if the property is on a buy to let mortgage.
Having said this, this process is complicated because of the rules around section 24 concerning buy to lets.
If this isn’t the case, the owner of the mortgage is the owner of the property and once all of the mortgage payments have been made perhaps after a few decades, they will be the rightful owner of the property.
Without the help of the bank or the guarantor.
When can the guarantor be removed from the mortgage?
A guarantor can be removed if they no longer meet the financial requirements in order to be the guarantor. They could fill out a self assessment form and realise their business isn’t doing as well as previous years and that their income has gone down.
In a situation like this, it is advisable to let the bank know so they can make the right changes and the bank may ask the mortgage owner to find another guarantor in order to continue with the same mortgage terms.
However, there are a variety of options available to the buyer at this stage including remortgaging the property with another lender with less strict terms.
Otherwise, a mortgage guarantor will most likely be removed from a mortgage after a certain amount of the mortgage payments have been paid off or a set number of years has passed anyway.
This should be agreed upon in writing between the lender, the guarantor and the buyer before the mortgage application is signed for.
What happens if the guarantor cannot pay?
If a guarantor cannot pay, this usually means the lender made a big mistake in the financial check of the guarantor. A check is usually so thorough that this means the guarantor is able to pay most of the time.
However, their checks aren’t perfect and there are also unexpected situations that mean the financial situation of a guarantor can change. For example, a business could go bankrupt or someone could sell a lot of assets.
Nonetheless, deliberate liquidation of assets and the redistribution of wealth with the knowledge you’re a mortgage guarantor could mean you’re in breach of the mortgage agreement you have with the owner of a mortgage and the lender.
As a result, the lender will look carefully into why the guarantor cannot afford to make payments and still pursue what money they can in the process.
Sometimes, this means legal action and the bank will take efforts to prove the guarantor is in the wrong legally. Other times the lender will let things go, accept their loss and move on, repossessing the property and selling it at a loss.
Overall, this is extremely rare though as a lender also may ask the guarantor to put some savings in a special type of guarantor account that is always there as an emergency fund in order to protect the mortgage payments.
This means it is extremely difficult for a mortgage guarantor to get out of paying if they don’t want to and only the most extreme financial situation will result in a guarantor not having to pay without consequence.
To conclude
In conclusion, a mortgage guarantor can be a valuable tool for borrowers who need help securing a home loan and if you’re still struggling, it is recommended to perhaps look into getting a mortgage without payslips.
By offering an added layer of security, it can increase the chances of approval for those who might otherwise struggle to qualify for a mortgage. However, it’s important to carefully consider a guarantor’s responsibilities.
Having a guarantor can only work in certain situations, so it’s crucial to understand all the factors that allow a mortgage guarantor to step in and make a difference to your application.
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