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Guarantor mortgages: How to get a leg-up onto the property ladder

By Dominic Welling dominic.welling@consumerchoices.co.uk

If you haven’t got the income to get mortgage, a guarantor mortgage - with help from your parents - is one way to get your foot on the property ladder.

For the past ten years, property prices have been rising faster than earnings, and the average house price for first-time buyers is now more than four times the average annual salary. So, if you’re a first-time buyer struggling to get mortgage approval, there is an option available that you might not yet have considered: guarantor mortgages.

Providing you have financially stable parents or relatives - or even a good friend - who would be able to repay your mortgage for you should the need arise - you could qualify for a guarantor mortgage.

How can parents help with a mortgage for their child?

Guarantor mortgages are a helpful way of making that first step onto the property ladder, and they are gaining popularity with young first-time buyers.

Parents, or a relative, would either need to show their own mortgage has come to an end or is near to being paid off and that they have sufficient disposable income to support the prospective buyer in the event of them not being able to meet the payments.

The guarantor is then able to hold the mortgage in the buyer’s name, acting as guarantor to pay the monthly bills should you the buyer be unable to meet the repayments.

However, a guarantor mortgage - a parental assistance mortgage - means you don't have to use your parents as the source of a deposit. By getting parental help with the mortgage, you can secure a larger mortgage and buy your new home sooner.

Some of the lenders that offer these mortgage products include The Mortgage Works (TMW), the specialist lending arm of Nationwide Building Society, The Co-operative Bank, and Lloyds TSB.

How do they work?

There are two main types of guarantor mortgage available - full liability and limited liability:

1. Full liability - In this case, should you default on your mortgage payments, the guarantor, for example parents or grandparents, would be liable for the entire debt. The guarantor has to agree unconditionally to pay up if you default.

Here’s an example of a full liability mortgage as offered by The Mortgage Works:

Simon wants to buy a property priced at £100,000. His parents can afford to guarantee the whole of his loan, so he qualifies for a Full Liability Guarantor Mortgage at 85% loan-to-value (LTV).

Parents guarantee 100% of the loan

2. Limited Liability - In this case, the guarantor’s liability is limited to your shortfall. For example, if you can only afford a £130,000 mortgage, but the property you want to buy is £150,000, your Mum and Dad will provide security for the £20,000 difference.

The Mortgage Works recently unveiled a new range of limited liability products where the guarantor must be able to afford the shortfall, which cannot exceed 30% of the total mortgage debt.

On top of this, in the eventuality that you should default on the mortgage payments, they must be able to provide cover for a further 10% of the debt.

With these products, the borrower needs to be able to afford a minimum of 70% of the loan themselves and, rather than the full amount, the guarantor guarantees the difference plus a further 10%.

Many people are willing and able to guarantee a smaller sum and this product provides a much needed alternative to the standard Full Liability option. As an example:

Emma is looking to buy a house and can afford 70% of the total loan required. Her parents would like to help her and can afford to guarantee the difference of 30% plus the further 10%. Emma qualifies for a Limited Liability mortgage.

Parents guarantee 40% of the loan

It is worth noting that the products offered by The Mortgage Works are only available through professional mortgage intermediaries, But it is always a good idea to pay for an hour of a specialist IFA’s time to discuss your mortgage needs and options, before committing to anything, regardless of who’s lending you the money.

How much can I borrow? - Income multiples

If your lender uses income multiples to work out borrowing limits, you can also benefit from your guarantor's borrowing power.

By combining your income with your parents’ income, you can increase the size of mortgage available to you.

Lenders can offer more money towards your mortgage because they can base their calculations on the combined incomes of you and your parents as you are responsible for paying the loan and your parents are underwriting it.

How risky are guarantor mortgages?

Be warned, there is a very real risk associated with guarantor mortgages.

In particular whoever agrees to act as guarantor to the mortgage will be at financial risk - and could even lose their home - if you can’t make your repayments. So be sure you will definitely be able to meet the payments or else you might have a huge fall out with someone very close to you.

Things worth thinking about

Lenders prefer guarantors to be under the age of 60 at the time of making the application. This is to avoid any potential changes to their income level in the run-up to retirement, and in turn their financial ability to be guarantor.

For example, when someone is approaching retirement, lenders worry about the state of their personal finances and household cashflow, given that the guarantor’s income has to be able to cover the entire loan should you default.

Also, in the case of guarantor mortgages, lenders will look for buyers who have mapped out a structured career path.

As the idea is to eventually remove the guarantor from your mortgage and take over the financial responsibility yourself, it is important to show the lender that your income is likely to increase as your career progresses, and that your taking more control over your mortgage in the next few years is a realistic prospect.

THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.