Using a guarantor may allow you to obtain a mortgage approval when you otherwise would have been denied.
There is a great deal of misinformation in the public realm regarding mortgage guarantors, thus the following sections will hopefully help to clarify some of these points.
- What is a mortgage guarantor?
- Who can serve as a mortgage co-signer?
- What qualifies as an excellent mortgage guarantor?
- Who offers mortgages with a guarantor?
1. What is a guarantor mortgage?
A guarantor mortgage, or family-assisted mortgage, is where another person assumes responsibility for your repayments in the event you cannot make the repayments yourself. This person is typically a parent or family member and is known as the ‘guarantor’.
2. Who can serve as a mortgage co-signer?
Almost anyone can serve as a mortgage guarantor, although lenders often seek one of the following qualifications.
Here is a list of individuals who can serve as a guarantor:
- A close family member. This can differ depending on the lender, but could include:
- Uncle or Aunt
- Anyone who is a close blood relative
- Other choices. Depending on the lending institution:
- Adoptive parent
- Spouse (some criteria will apply)
- Distant relatives
In principle, a lender may accept any type of relationship between a guarantor and a borrower as long as they are satisfied with the situation now and in the future, depending on the projected duration of the guarantee.
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3. What qualifies as an excellent mortgage guarantor?
If you need a guarantor and are fortunate enough to have someone who is ready to serve in this capacity, you will need to be aware of some of the fundamental criteria that lenders use to determine if a borrower’s circumstance meets the criteria.
You should familiarise yourself with the requirements and misconceptions before considering a guarantor mortgage:
- Income – As a guarantor is responsible for making your mortgage payments if you are unable to, they must be able to demonstrate that they can afford this. As a result, income is the most important factor that lenders consider.
- Assets – As stated previously, a lender will evaluate a guarantor’s assets based on his or her capacity to make mortgage payments throughout the term. Therefore, despite the fact that many lenders would still want a guarantor to be a homeowner, this is not a requirement. The quantity of assets, including the value of their own home or other properties, is irrelevant. Also included are liquid assets such as savings and investments. This is one of the most widespread misunderstandings regarding appropriate guarantors who may be “asset-rich” but cannot demonstrate enough income-based affordability.
- Age – Since a guarantor is expected to provide assurances for the entire mortgage term, age is a major factor. For instance, if you are a 25-year-old first-time buyer seeking a 35-year mortgage, it is quite improbable that a lender will accept a 55-year-old guarantor with their own employment income. Even if you intend to remove the guarantor in a short period of time, a lender cannot be assured of this and must work under the assumption that the entire mortgage term must be guaranteed.
- Credit history – Since the guarantor is providing assurances to the lender, he or she must have a good credit rating. Lenders may take a position on isolated cases or those with special circumstances surrounding adverse credit occurrences, but each case must be evaluated on its own merits.
4. Who offers mortgages with a guarantor?
In the current market, the number of lenders who accept guarantors has reduced significantly. Indeed, due to the perceived difficulty of guarantor mortgages, lenders have devised other schemes that are now more commonly accepted and may be considered the new standard for possible guarantors.
Other alternatives include:
Joint Borrower, Sole Proprietor
A Joint Borrower, Sole Proprietor (JBSP) mortgage is similar to a guarantor mortgage. The main difference between the two is that the ‘guarantor’ is named on the mortgage application but is not considered to own a share of the property. However, borrowers assume equal liability, meaning all borrowers are liable to pay the mortgage.
First Start Mortgage
Originally intended to support first-time buyers, First Start Mortgages were to assist borrowers who lacked a substantial deposit but could demonstrate their ability to repay. This mortgage type has evolved and is now available to any customer, subject to meeting specific requirements.
In instances such as this, it is not uncommon for relatives or friends to assist with a non-repayable deposit. However, people who wish to contribute to the down payment may not have the funds to do so outright.
In this situation, a First Start Mortgage may be the best option. Instead of providing the funds as a gift, the backer agrees to deposit a particular amount of savings into the mortgage provider’s savings account. This stays in the name of the employee, and interest is typically paid in return.
The agreement stipulates that the funds must remain in this account for a minimum of three years. If the mortgage is paid in full and on time at the end of the specified period, the helper is free to withdraw the funds and their obligation as security ceases.
Poor credit guarantor
If you have a low credit rating because of poor credit history, it is unlikely that a guarantor will be a suitable solution for mortgage approval. It’s recommended that you consult a mortgage broker who can discuss your options with you and find lenders who specialise in ‘bad credit’ mortgages.
A guarantor mortgage broker
You don’t need to work with a mortgage broker who specialises in guarantor mortgages, but a competent advisor will be knowledgeable with the various programmes and lenders’ criteria. First, they will determine if a co-signer or guarantor is required and, if so, will explore all of your choices. Bear in mind that even if a guarantor or alternative scheme is the best course of action for you, market availability will likely restrict your options somewhat. Contact us for assistance acquiring a guarantor mortgage.