A guarantor mortgage gives you an alternative route onto the property ladder. You may be able to get a mortgage even if you have no deposit or a bad credit score. A mortgage guarantor is someone – usually a parent, a relative, or even a close friend – who will cover your mortgage repayments if you can’t pay them for any reason.
If you are in this situation and are considering a guarantor mortgage then it’s worth seeking legal advice before committing to anything. If you’d like to find out more about how it works, read on.
A guarantor mortgage is when one person agrees to make up the shortfall of money that another person needs to borrow from a bank or building society.
The borrower then pays back the loan over time with interest. In return, the guarantor receives some sort of benefits such as a free holiday home or cashback on their mortgage payments.
Guarantor mortgages aren’t as common these days but remain a quick route for first-time buyers to get themselves going.
You might think that only people with good credit scores should be allowed to apply for a guarantor mortgage but we know that there are many reasons why people struggle to get loans. For example:
• You don’t have enough special savings
• Your income isn’t high enough.
• You don‘t have a job
• You haven’t paid off all your debts yet such as a credit card
• You owe too much money to other creditors and could be a risk for monthly payments
• You live abroad.
• You have a poor credit history.
If you meet these criteria, you could still qualify for a guarantor mortgage. However, you need to show that you have a reasonable chance of repaying the loan. This means that you must have a minimum worth of assets and a monthly income that exceeds a specific amount.
This type of mortgage product is similar to a standard mortgage, whereby monthly repayments will need to be made.
The lender will ask you to provide proof of income. They will also check whether you own any assets. Once they are satisfied that you do not pose a risk of defaulting on the loan, they will give you a mortgage guarantee which will enable you to get a better deal than you would otherwise. This is the same if you’re applying for a joint mortgage product.
With a guarantor mortgage, the lender will often offer you a lower rate of interest than you would normally get. Speaking to a variety of mortgage lenders to get a feel for the rates won’t do you any harm here.
Why not just take out a regular mortgage? Before committing to a guarantor product, you should speak to a mortgage broker who will be able to walk you through the process and provide all the information you need.
However, there are several advantages to using a guarantor mortgage instead of going through the normal process. Here are six main ones:
It takes longer to get a regular mortgage approved. As well as having to fill out lots of forms, you will also have to go to an office where you will probably have to wait around for ages before being told anything. On top of this, you will also have a lot of paperwork to complete.
By comparison, applying for a guarantor mortgage is quick and easy because most lenders already have everything ready for you.
When you apply for a guarantor loan, you will almost certainly get a better deal than if you applied for a traditional mortgage.
Most guarantor mortgages come with a clause that allows you to break the agreement at any point without paying penalties. This means that if you lose your job or your circumstances change, you won’t have to worry about losing your house.
When you are borrowing money, you always have to consider what happens if you cannot afford to pay the full amount back each month. With a guarantor mortgage, however, you can rest assured knowing that if things go wrong, your guarantor will step in and help you out.
Because you are guaranteed by someone else, you can save yourself thousands of pounds in fees and charges. These include application fees and legal costs.
If you can prove that you have a decent chance of repaying the debt, you can borrow more money than you would normally be able to.
There are three types of guarantor products available from the major banks and building societies. Each one has its own set of benefits and drawbacks.
The first is a standard guarantor mortgage. This is basically a form of insurance against bad times. If you don’t make your payments, your guarantor will cover them for you. However, the lender will charge you higher interest rates than usual.
A second option is called a ‘guaranteed secured’ mortgage. This is like a standard guarantor mortgage but it comes with extra security features such as a deposit.
Finally, there is a ‘no-deposit guarantor’ mortgage. You won’t need to put up any cash upfront. Instead, you will be asked to sign over some other property as collateral. You should speak to a financial expert before committing to this type of product.
As mentioned earlier, when you apply for a standard guarantor mortgage, you will usually get a much better deal than you would with a conventional one.
However, you may find that the best mortgage deal and offers aren’t offered by every bank or building society. So, you might want to shop around until you find a lender willing to offer you a good deal.
Speak to a member of our mortgage team today and we’d be happy to help you get your mortgage application underway and discuss eligibility criteria.
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