Guide to guarantor mortgages
With an average house in the UK now costing just over £ 250,000 and many lenders pulling their mortgage deals at 90%, a typical first-time buyer will need a deposit of around £ 50,000 to get a foothold. housing scale. This is why collateral mortgages can offer an alternative to home ownership.
A collateral mortgage is a mortgage for a person who does not qualify for a loan on their own, but to whom a lender is happy to make a loan as long as a third party acts as a guarantor. If the borrower has problems, the lender can ask the guarantor to make up any shortfall.
The guarantor’s home is threatened if the new borrower is in arrears.
What is a guarantor?
Although it is the named borrower who owns the property, the guarantor gives a legal guarantee that he will intervene and reimburse if the borrower falls behind.
Usually the home of the guarantor is used as collateral and can be taken back in extreme cases. But sometimes the lender is happy to sit on a cash deposit from the guarantor which is paid back (usually with interest) once the borrower has made a set amount of repayments. If there is a default in the meantime, the lender can use the cash deposit to make up any shortfall.
If no reimbursement is missed, nothing will be required of the guarantor. It is only if things go wrong that the lender expects the borrower and the guarantor to fix things.
Who can a secured mortgage help?
Guarantor mortgages normally appeal to borrowers with small or no deposit, who have low income and / or have a poor or no credit history.
Lenders will continue to make affordability checks on the borrower and they shouldn’t take a mortgage if they think the borrower will be in trouble. But if the lender has some doubts about the borrower’s long-term capacity or simply does not have enough information to be 100% sure of the loan grant, having a guarantor on board may be key. .
A guarantor will also be subject to a credit check to ensure that they are a responsible borrower in the event that they need to make repayments on behalf of the borrower.
Who can be a guarantor?
Banks and mortgage lenders generally expect a guarantor to be a close family member of the borrower. As a rule, borrowers take out parental guarantee mortgages, but not strictly to parents.
All guarantors must be full owners. Some lenders expect them to have paid off their mortgage in full, although other lenders are less strict about this.
How much should a guarantor earn?
There is no set amount that a guarantor must earn. The lender will perform a credit check on the guarantor and consider their income, but usually the lending decision is made based on the combined means of the borrower and the guarantor.
It is the fact that the guarantor provides collateral (their own home or a lump sum of cash) that is most important to the lender. For this reason, retirees who own their home can often act as guarantors.
Other Family Assisted Mortgage Options
If parents, grandparents, or the whole family can’t help with buying a home (which is the most direct way to help, but isn’t really on the table for most families), it are a number of ways that families can help first time buyers.
Offer a cash deposit
If you can afford it, offering some or all of the amount a first-time buyer has to put up as a deposit is perhaps the easiest way to help them move up the housing ladder. Just make sure you are following the correct procedure by read our guide to gifted deposits.
However, if the prospective buyer has low income or a bad credit rating, just having a down payment will not be enough to secure a mortgage.
Mortgage family deposit (or family compensation)
A family deposit mortgage can help increase a first-time buyers’ deposit without a family member giving the money directly.
By depositing money into an account linked to the borrower’s mortgage, a family member’s savings can be offset against the mortgage, making repayments more manageable. Typically, however, the borrower will need a deposit of at least 5% of their own amount.
There are cases where the borrower will not need to put down a deposit, but this should be approached with caution.
Once a sufficient period of time has passed, or a sufficient portion of the mortgage has been paid off, the family member will then be reimbursed in full, and often with interest. The downside is that it could take many years.
Five tips to help your kids climb the ownership ladder
If you are a parent who is considering helping their child buy their first home, there are a few steps you should consider before you rush out and offer financial help.
1. Take into account each person’s situation
Obviously, the first thing you need to think about is your own financial situation. What are your resources? What financial assistance can you provide?
Then think about what help your child will need: can he own a house and maintain a mortgage? Talk to them candidly about their situation, if they would like to own a home, and if they want your help in buying one.
Maintaining a property requires commitment and financial security, it could be risky if they find themselves in a situation of having to maintain mortgage payments or other maintenance costs that they cannot afford.
2. Be clear about your intentions
It will save you a lot of potential stress and confusion if you are clear from the start about what you want to do to help your child and the terms of your financial aid.
You need to decide whether you are giving your help in the form of a gift, an investment, or a loan (and whether you will charge interest), and make it clear to your child beforehand to avoid confusion afterwards.
3. What are the tax implications?
If you donate money, this may also be subject to inheritance tax if you die within seven years.
Depending on how you collect the money to donate, you may also need to pay a capital gains tax, as this could be interpreted as a “disposal” of assets.
4. Get a lawyer
You hope that no dispute will ever reach the point of having to bring in lawyers, but drafting formal agreements with a lawyer beforehand might be a good idea, especially if you are treating your home help like a loan or an investment.
On another legal note, if you want to make sure that the house cannot be sold without needing your permission, you can contact the cadastre to have the sale of the property restricted without your consent.
5. Respect the limits
Whether you bought the whole house, helped out with a deposit, or acted as a mortgage guarantor, you need to remember that this is not your house and you shouldn’t really be making rules about how your kids get there. live.
You would have every right to ask them to respect your wishes regarding the property, but it is obvious that using financial aid as emotional leverage is likely to cause strain in any relationship.