Do I Need a Guarantor Mortgage?
Do I Need a Guarantor Mortgage?
Steven Hargreaves answers some frequently asked questions on guarantor mortgages.
What is a guarantor mortgage and why would I need one?
Guarantor mortgages are not what they used to be. When I started out as an Adviser, a guarantor mortgage was something that a lot of people took. For argument’s sake, if my son decided to buy a house and he didn’t have quite the income that he needed to buy it, I would be his guarantor.
I would be a party to that mortgage.
When the lender is looking at putting the mortgage together, they would then look at both our incomes. With my income added to his, there should be enough for him to buy his first house. That’s how a guarantor mortgage has always worked.
I get asked about guarantor mortgages quite regularly – probably weekly or fortnightly; but bizarrely enough, very few lenders do a traditional guarantor mortgage these days.
Today, this sort of arrangement is called a Joint Borrower Sole Proprietor (JBSP) mortgage. In that example, where I’m helping my son buy his first house, with a JBSP mortgage I’m not on the deeds to the property, I’m just on the mortgage.
That is the modern form of a Guarantor Mortgage. It has very similar rules and regulations to a guarantor mortgage – it’s just a modern update to it. We do have a whole podcast on Joint Borrower Sole Proprietor mortgages you can listen to.
Is it easier to get a mortgage if you have a guarantor?
It isn’t any easier or harder. In that example, where my son hasn’t got enough income, he can’t get a mortgage anywhere. Using my income would get him over the line.
A lender would just ask for my payslips and his. They would look at my liabilities and his liabilities – but it isn’t any harder or any easier to get a mortgage with a guarantor or on a Joint Borrower Sole Proprietor. It’s exactly the same process.
There is one slight difference with regards to the legal side of it. Many solicitors want the parent or other relative to take independent legal advice. It’s not normally expensive – it will maybe add a couple of hundred pounds to your legal bill.
The solicitor would act on the guarantor’s behalf to make sure everyone understands the ramifications of the Joint Borrower Sole Proprietor set up.
What are the types of guarantor mortgage?
The main type now is the JBSP. Within that, you can still look at a fixed rate mortgage, a discounted mortgage, a tracker rate mortgage or a standard variable rate. The actual rates are identical.
There isn’t a special set of rates for guarantor or Joint Borrower Sole Proprietor products. In that respect there is no difference.
I suppose one slight issue is the term. My son turns 26 this month and he might want a 35 year or 40 year mortgage. They’re all readily available depending on which lender you’re looking at. With a 40 year mortgage, you will pay more interest but the monthly repayments are cheaper. That could be helpful while he’s not earning as much and is a bit younger.
But a guarantor or Joint Borrower Sole Proprietor mortgage tends to go on the age of the guarantor. In my example, I’m 54, so the majority of lenders would want that mortgage completed by my 70th birthday. That would mean a 15 year mortgage, which is significantly shorter than my son could have on his own. So the repayments could be more expensive, depending on the age of your guarantor.
Will I be able to borrow more with a guarantor mortgage? How much could I get?
Possibly, because you’re using two incomes rather than one. There is a difference between the old guarantor system and the JBSP. In my previous example, the lender would just use my son’s income and I would be guarantor to make sure the mortgage is paid. With the JBSP, we’re actually using my income plus his income to assess affordability.
I’ve recently raised a Joint Borrower Sole Proprietor mortgage where the client was on a fast-track income. At the time of applying he earned £26,000, but in six months it should be £27,500. Six months on from that, it should be £30,000 and so on, as long as he passes some exams.
Within a very short period of time – he estimated three years – he would be on nearly £40,000 a year. He and his father have taken a three-year fixed rate mortgage, using their joint income to borrow more than he could have on his own.
So instead of buying a small terraced house, he’s bought a three-bedroom semi. It would have been well and truly out of his price bracket, but his dad’s income makes it affordable. And in three years’ time he won’t need his dad. He should be able to afford that mortgage on his own income. We will then remortgage that house and take dad off the mortgage – it will just be in his name.
Do guarantor mortgages have higher interest rates?
No, they have identical interest rates, and you’ve still got the same fixed rate, discounted rate, tracker rates or variable rate options. There’s no difference. It’s just about how much you can afford using the guarantor behind you.
Who is a guarantor mortgage suitable for? How do you qualify for a guarantor mortgage?
It’s purely down to income. For a First Time Buyer we would look at their income and liabilities to find out what they could borrow, and what impact it would have to add a family member to the mortgages. We would also be looking at their outgoings.
If the guarantor has a mortgage on their own house, that gets taken into account, as do loans, HP, finance, credit cards and credit agreements. It is a little bit more technical in that we need full details of both the applicant and the guarantor to work out what they can borrow. But with most lenders’ affordability calculations, it can be done quite easily.
What documents should I provide for a guarantor mortgage?
As I’ve just mentioned it comes down to income, assets and liabilities. So we’d need payslips and bank statements. We would also need ID verification for both applicant and guarantor. So we would need the guarantors’ payslips, bank statements, driving licences and ID.
We would need to know exactly what their commitments are too – loans, HP, credit cards, etc. It’s just like doing a joint application for the two people on the mortgage. Anything we need for one, we’d need for the other.
Who can guarantee a mortgage?
This is down to specific lenders. It used to just be parents, but a lot of lenders have now extended it to aunts and uncles, and I think there is one lender that would look at friends as well as relatives. Lenders are trying to make it as accessible as possible, right across the board.
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What are the pros and cons of a guarantor mortgage?
The pros are fairly obvious – like in that example I gave, where the applicant can buy a three bed semi rather than a terraced house. It’s fantastic. He’s suddenly got that next step up and knows that if he passes his exams, that affordability won’t be an issue.
From a negative perspective, if affordability does become challenging, the lender is going to be knocking on dad’s door. In that particular case, I think dad was about 51 so we could only get a 19 year mortgage – which meant the payments were higher than the son wanted at the outset.
There’s a lot of talk these days about gifted deposits, and his dad was considering giving him quite a sizable deposit. But it was tied up in stocks, shares and bonds, so by being a guarantor he doesn’t have to draw money out. He can keep his stocks and shares as part of his pension.
He realises that if things get a bit sticky, he may have to help his son out – but I think most parents would do that if there was a major problem.
How much does a guarantor need to earn for a mortgage?
Everyone is assessed on an individual basis. You might get a guarantor earning £20,000 a year, or they might earn £150,000. It’s all based on what the son or daughter is planning to buy.
What happens if I am unable to make repayments?
If the child was struggling, the guarantor would ordinarily be called upon to help. You tend to find that the parents – or in one case I worked on, an auntie was the guarantor – would readily help their relative with a deposit or other financial help. So having to pay a few hundred pounds a month would usually be okay.
Can I get a guarantor mortgage for a Buy to Let property?
I am not aware of one, no. They are ordinarily for First Time Buyers – that tends to be one of the criteria. Buy to Lets tend to be based not on your own income but the rental income. So you wouldn’t really need a guarantor for a Buy to Let.
Can a parent be a guarantor if they are retired?
There are lenders that would look at this, but it will be a very short term. If I’d retired when I was 50 and I was on a very good pension, I could use that pension income as a guarantor. But we would still be limited to that maximum age of 70 years.
A Lender I was speaking to last week does an awful lot of Joint Borrower Sole Proprietor or guarantor mortgages, and they are looking at approving mortgages up to age 75. Many ordinary mortgages are going up to 75 now.
People are living longer and properties are more expensive than they were 20 or 30 years ago, so naturally people want to extend the term. Twenty years ago, the majority of mortgages were for 25 years. These days the average mortgage is 35 years, which just shows how things have changed.
Can I stop being a mortgage guarantor?
Absolutely. That would normally be when your son, daughter, niece or nephew has the ability to take that mortgage on their own. At that stage we would remortgage and take the parent or relative off the mortgage.
In that example I gave you, where someone was on a three year escalating income, that’s exactly what we will do. We’re aiming to take dad off the mortgage and the son will stand on his own two feet. That would be the natural progression. Your guarantor is only on there while your income’s a bit lower.
How do I get a guarantor mortgage?
This is where we come in. It can be a bit of a minefield when you start looking at guarantor or Joint Borrower Sole Proprietor products. There’s also Family Assist, Income Assist and Property Assist mortgages.
You would normally see an independent mortgage broker who will talk you through it. At the same time, they would talk to the person who’s taking the mortgage with you, the guarantor, to ensure there is no misunderstanding about their responsibilities.
I would take the guarantor’s income and their aims and targets into account, alongside those of the son, daughter or relative. That way we’re designing that mortgage for them, working out who is the best lender and the best approach, whether that’s guarantor, Joint Borrower, Family Assist, Income Assist or Property Assist.
Your home may be repossessed if you do not keep up with your mortgage repayments.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.