What is a Mortgage Guarantor?
A guarantor mortgage is a type of mortgage that uses a guarantor to secure the home loan. It works by helping to allow those who are usually struggling to secure a mortgage (either through an undesirable credit rating or other financial reasons) successfully apply for one and potentially increase the chances of acquiring the mortgage in question. It does this by securing the mortgage with someone deemed financially stable enough to pay off the loan if necessary [the guarantor] and if the borrower fails to keep up with or altogether make their required repayments.
A guarantor mortgage is a great way for those who have not yet built up a mortgage-worthy credit rating to get on the property ladder. However, there are numerous different factors to consider before going through with a mortgage that requires a guarantor to act as an additional layer of assurance for the secured loan in question and satisfy the mortgage provider's mortgage underwriting process and policies.
In this piece, we explain exactly what a mortgage guarantor is, how it works in the context of UK mortgages and many of the other commonly asked questions surrounding this topic.
What is a Mortgage Guarantor?
A 'Mortgage Guarantor' is someone who helps an often-struggling mortgage borrower to more successfully apply for a home loan, first or sometimes second charge mortgage in the UK. They are typically either a family member, close friend, or spouse with a mortgage-worthy financial history. ‘Mortgage-worthy’ typically refers to the guarantor being a person that will have a financial history that mortgage lenders will see as secure enough to lend a substantial amount of money to in the form of a home loan, such as a mortgage, home improvement loan or other mortgage-related product.
Financial history usually relies heavily on your credit rating that will have been calculated by the three major credit referencing agencies (CRAs): Experian, Equifax and Callcredit.
Those who have a lower credit rating, either through having a history of poor financial management or a lack of evidence demonstrating clearly adequate financial management, will struggle to successfully apply for a mortgage, as they lack the evidence required to show that they can successfully manage and repay a mortgage.
What to Look for in a Guarantor
Getting a mortgage guarantor can help those struggling to successfully apply for a mortgage, but it is best to pick your guarantor carefully, ensuring the following factors have been checked before going through with a guarantor mortgage at all:
- The guarantor has a financial history that meets the standards of the mortgage provider
- The guarantor is someone you trust completely and unreservedly
- The guarantor is someone stable and constant in your life
- The guarantor knows the extent of their responsibility and potential responsibility for your mortgage from the very outset
- The guarantor is fully aware they do not own any of the property the mortgage will be used for
Taking these considerations into account can help minimise the chances of any nasty surprises for either the mortgage lender, borrower or guarantor and will also help to further eliminate any complications arising during the period of your mortgage repayments.
How Does a Mortgage Guarantor Work?
A mortgage guarantor works by helping a mortgage applicant who is not yet deemed financially secure enough for a home loan. The guarantor is always someone who has a mortgage-worthy history with borrowing (primarily derived from the CRAs credit ratings), and provides the mortgage lenders with enough security to approve the application.
One the mortgage application has been successful and all of the necessary documents have been filled in, the guarantor of a mortgage in which they are involved, will be responsible for the repayments of this home loan in the event that the borrower cannot make their repayments.
Should I Use a Mortgage Guarantor?
Getting a guarantor for your mortgage can be extremely helpful, and can even help to improve your credit rating provided repayments are made on time and in full. However, it is not the best move for everyone, and will entirely depend on your current financial situation. A guarantor loan is suitable for:
- An applicant with a low income
- An applicant with little to no money for a deposit
- An applicant with a poor or absent credit rating
- An applicant wanting to buy a home that costs significantly more than the mortgage providers deem them able to repay
If you are struggling to find a mortgage due to your credit score, there are numerous other options to be explored in this area, that may perhaps be better than a guarantor mortgage.
It is always best to consider every possible alternative before settling on the correct mortgage type for you. Guarantor mortgages, whilst great for some people, can be quite difficult to get to grips with, especially when determining if it is the right move for your current financial situation. Speaking to a mortgage advisor can help figure out all available options, and furthermore, which option best suits your current situation.
Who Can I Use as a Guarantor for a Mortgage?
Guarantors typically have to own a property of their own or have sufficient amounts of equity to elicit trust from the mortgage lender. They also have to be earning an income that is certain to cover the mortgage repayments in the event that the borrower fails to make these. The guarantor also has to have a good credit rating, and a healthy history of financial management/credit borrowing.
A mortgage guarantor is also typically someone very close to the home loan borrower, and is usually either a family member, a close life-long friend, a spouse or other similar type of close relation. It is important chose a guarantor who is a stable part of your life, that you have known for a long time and plan on remaining in contact with for the foreseeable future.