How does a guarantor mortgage work?
Many lenders now insist the guarantor is named as a joint applicant on a parent guarantor mortgage - a type of mortgage where parents guarantee that the borrowed funds will be repaid if their children are unable to repay the mortgage. Previously, guarantors didn’t have to be named.
This means guarantor mortgages in the UK now have different names, including:
- family offset mortgages
- flexible family mortgages
- family springboard mortgages
- joint borrower, sole proprietor mortgages
Both borrower and guarantor are responsible for the mortgage repayments. But using a guarantor for a mortgage means they’ll take on the risk as the home and/or savings used as security could be repossessed if repayments aren’t made.
The borrowers’ credit history and affordability are assessed by lenders when deciding how much to lend.
There are other potential costs linked to taking out a mortgage with a guarantor. For example, if the guarantor already owns a home, naming them on the deeds constitutes a second home which increases stamp duty costs.
You should therefore seek independent financial and tax advice if you’re considering this type of mortgage.
In the case of a ‘joint borrower, sole proprietor mortgage’ - where two people borrow but only one name is on the deeds - the owner qualifies as a first-time buyer. This means they’re exempt from stamp duty on the first £300,000 of properties worth up to £500,000.
A guarantor can also guarantee part of the mortgage. If they guarantee the entire mortgage the borrower might not need a deposit. Alternatively, they may guarantee the mortgage amount above 75% or 80% of the property value.
If all mortgage repayments are made on time, the mortgage works in a normal way and the guarantor doesn’t have to pay anything. But it’s important to understand that a guarantor could lose the property or other security they used to guarantee the mortgage if repayments are missed.