Writer Cormac Reynolds writes about a home loan product unique to the United Kingdom. Parent guarantor mortgages are not available in the US. However, there are similar loans where a third party guarantees the payment of the mortgage, for example, VA and FHA home loans.
A guarantor mortgage helps a first-time buyer with the purchase of their first home. If you’re in the housing market, you’ll agree this isn’t the easiest of times to be a first-time home buyer.
Real estate prices are climbing, and lenders are tightening their mortgage application process. The process places most first-time buyers under a financial microscope before approving their applications.
Guarantor mortgages are slowly disappearing under such conditions. This is quite a loss to most of the buyers who planned to take their first step onto the housing ladder.
What Is A Guarantor Mortgage?
A guarantor mortgage or loan with a guarantor allows a close relative – such as a parent of the buyer – acts as a guarantor on the loan. In case you find it challenging to meet the payment obligation, the lender will pursue the guarantor for the outstanding debt.
Young adults who are looking to buy their first home find a guarantor mortgage very appealing. They can borrow more than what they can get from a standard mortgage under these conditions.
This is because the guarantor’s income is also taken into account when considering the mortgage application.
Eventually, the guarantor can be removed from the mortgage at a later date. Usually, when the lender is satisfied the primary borrower can pay future installments without any problem.
Lenders Who Offer Guarantor Mortgages
If you plan to take advantage of a guarantor mortgage, you have a smaller pool of lenders to choose from right now. In fact, the lender Newcastle Building Society confirmed it would be scrapping guarantor mortgages very soon.
On the other hand, the Royal Bank of Scotland and NatWest have already dumped the guarantor mortgage back in April. Virgin Money still considers guarantor mortgages.
The lender insists the guarantor be a blood relative of the borrower. Also, the borrower must justify why the guarantor is necessary.
Acceptable reasons to the lender are:
- The buyer is a young professional who plans for an increase in their salary within a couple of years. This way the buyer will be able to support the mortgage on their own in the long-term.
- A self-employed individual wants to act as a guarantor on behalf of their spouse or partner.
The Market Harborough Building Society is offering a Family Pledge Mortgage – where a parent could act as a guarantor for the mortgage and promise to pay the mortgage if the applicant is unable to pay it.
Family Guarantee Mortgage
There are lenders who offer a type of mortgage that is quite similar to a guarantor mortgage. It allows a parent to take some responsibility on the mortgage of their child.
Aldermore Mortgages provides a Family Guarantee Mortgage – which is ideal for the 1st or 2nd-time buyer with no money to put down. In fact, the lender offers up to 100% of the property value under this condition.
The parent should offer a guarantee for the mortgage value above 75% of the loan-to-value (LTV). For instance, if you plan to invest in a property worth £200,000 with a 100% LTV mortgage, the guarantor should offer a guarantee for the final £50,000 of the mortgage.
The guarantee comes in the form of a lien on the property of the guarantor. It won’t increase in size over time since it’s capped. The maximum period of the guarantee is ten years.
The guarantor won’t be pursued in the event of arrears. But he or she will be responsible for any shortfall if the property is foreclosed – up to the maximum amount of the guarantee provided.
The Market Harborough Building Society, Bath Building Society and National Counties Building Society offer similar mortgages. On the other hand, Woolwich Family Springboard Mortgage will lend up to 95% of the LTV – as long as the parent is able to put 10-percent of savings of the property value into a Helpful Start Savings Account.
The account will be closed in three years, and the parent gets back their money back with interest. This is as long as the borrower is current with their payments.
Have you acted as a guarantor for a family member? Tell us about your experiences in the Comments.