Like with any major financial decision, it’s important to work out if you can afford to support your children or grandchildren. It may be that you have savings or investments that you can cash in to help, but things you ought to think about include whether you may need that money in the future, what tax implications are, and what standard of living you’d like to have. There are many ways you can offer to support children or grandchildren via other mortgage options, so make sure you know what you’re offering and what that means for your finances. The best thing to do is speak to a mortgage or financial adviser to help assess your financial situation and your options.
“As a mortgage guarantor, you are guaranteeing that you can make the repayments on the borrower’s mortgage, should you need to. You will be named on the mortgage but you won’t own a share of the property, nor will your name be on the deeds. You’re purely responsible for making the repayments, should the borrower fall behind. For this reason, people tend to be guarantors only to those they know really well, which is usually parents or a close family member.
“You can use your savings to offset against the mortgage - you’ll have a savings account that is essentially provided by the mortgage lender. Depending on the terms of the mortgage, there will be restrictions on when and how much money you can withdraw from the account until a certain amount of the mortgage has been paid off or the level of equity increased beyond a specific loan to value.”
What is a mortgage guarantor?
Being a mortgage guarantor is one way to help someone who might otherwise struggle to get approved for a mortgage, or get their foot on the property ladder. For many first time buyers, the biggest hurdle they face is finding the money to put down as a deposit. Not having the deposit will put many lenders off, meaning they could struggle to get a mortgage offer accepted. However, by being someone’s mortgage guarantor, you could still help them get the keys to their dream home. It’s important to just make sure you’re clued up on exactly what it involves, as there are some risks that you need to be aware of.
There are two ways a person is able to be a mortgage guarantor:
1) Use your savings to offset against the mortgage - you’ll have a savings account that is essentially owned by the mortgage lender. Depending on the terms of the mortgage, you might not be able to withdraw any money from the account until a certain amount of the mortgage has been paid off.
2) Use your own property to offset against the mortgage - if a lot of repayments are missed, you could be at risk of having your home repossessed.
Who can be a mortgage guarantor?
This differs from lender to lender, but generally speaking either a parent, step-parent, grandparent, or friend could potentially act as a guarantor. As a mortgage guarantor, you will need to meet the following criteria:
- Be over 21 years old
- Own your own home outright - or have build up enough equity to meet the lender’s criteria.
- Have a good income - this proves you have enough money to meet any defaulted repayments, as well as paying your own mortgage, if you still have one.
- Have a good credit score - again, to show you’re financially reliable.
- Seek legal advice - some lender’s will need to see proof that you’ve had legal advice before the application can continue.
Does being a guarantor affect my mortgage?
It won’t directly affect your current mortgage but it could affect any future mortgage applications you make. When applying for a mortgage, lenders are primarily looking at every aspect of your financial life, including any debts or dependents you might have. As a guarantor, you are responsible for paying your family member or friend’s debt, so the lender has to take this into consideration when calculating your affordability.
Do you have to be a guarantor for the whole term of the mortgage?
Once the borrower has built up enough equity in their home, depending on the original agreement with the lender, you can be removed as the guarantor.