A Guide to Guarantor Mortgages
Buying a home can be tricky. And more often than not, you won’t find yourself going through it completely by yourself. This can take many forms, whether you’re moving into a property with a partner, a friend or even a pet! Another way of having another party involved with your house purchase is through guarantor mortgages. We’re going to show you how they can be a great help for people making their first move up the property ladder who may find themselves coming up short on affordability.
When you’re signing to your first mortgage, your parents/guardians are usually never far behind making sure you’re doing everything in the same way they would. This could be by means of lending general emotional support or acting as a guarantor for you. Guarantor mortgages are in effect a promise to your mortgage lender from a related third party, agreeing that they the mortgage will be paid, by either you or them. In some instances, the third party provides cover for you as collateral with the lender. It also means that if you have taken out a mortgage and are unable to pay the remainder of it, your guarantor will step in and pay.
Sounds great right? Due to fluctuating interest rates, young people are often having to rely on their parents for help when buying their home. So, don’t worry, millennials. We’re going to tell you why guarantor mortgages could be the right option for you.
How to use Guarantor Mortgages
Guarantor mortgages can be a great safety net for young people trying to get a mortgage. While you might think someone else offering you financial assistance may dent your pride, relax and take a step back. If the help is there, take the pressure off yourself! This may be an extremely attractive option for those who are self-employed, have a poor credit rating and thus have a lack of lenders who can provide them with a mortgage deal.
For some lenders, having a guarantor shows that you have a 'financial alibi' who can pay on your behalf if anything goes wrong. Thus, meaning that they, unsurprisingly, have their primary concern solved in that they get any money that they are due.
Your guarantor will have to maintain this situation until the loan to value ratio has been met. Generally speaking, lenders will say that the loan to value ratio has dropped around 20% before the guarantor has his payment duties relieved.
While this might seem all fine, don’t forget that guarantor loans still require a deposit.
Though be warned guarantors, this comes with its pitfalls. If the guarantor has their property secured against the property and neither you or your guarantor are unable to pay the loan, then they risk having their own home repossessed should the sale of your own home repossession not cover all the costs. So, readers, be vigilant!
Assess every party’s financial situation
This part is for the guarantors!
Make sure that if you’re signing up as a guarantor that you have the capacity to be one! This means that you’re going to need to work out how much you can afford so that you can help out when called upon. As a guarantor, it will be vital that you DON’T over-commit. Remember that being a guarantor is can be a positive step in helping your son or daughter climb onto the property ladder, but you need to weigh up the risks involved. If you stretch yourself too thin, then the payment plan will have no longevity and can leave you needing help yourself.
Once you’ve worked out your financial capability, you will then need to assess the capabilities of the borrower. This means you will need to assess whether or not they can sustain consistent mortgage payments and deposit payments. Parents acting as guarantors, we’re mainly talking to you. While we’re sure you’d be very proud that your son and daughter is about to move into their beautiful new home, please make sure they have the means to do so.
This is where we can help! At Mortgages Online we can offer you objective advice on which guarantor mortgage you, as a borrower, should opt for. We know there are going to be loads of different lenders telling you that the deal they are offering is the best. So, get in touch with us and we’ll find out which one is actually the best guarantor mortgage for you!
As a guarantor, you will be required by the lender to seek your own personal legal advice, to ensure you are fully aware of what you are committing to. Hiring a reputable solicitor can be an excellent addition to the process. While there will be some fees involved, it is vital you are going into the agreement knowing your responsibilities and commitments to the lender. A solicitor will be able to effectively translate any legal jargon that presents itself and make sure you fully understand the T&Cs of any contracts and liaising with other parties.
Depending on the type of support that’s being touted, the guarantor’s name could actually appear on the deed of the house. If this does happen, don’t be alarmed. It may mean that you come into contact with some of the taxes that are akin to property ownership. This may include taxes such as stamp duty or capital gains tax.
Tax is a large part of making payments and it coming as collateral to a property deal is no different. Though this can be escaped if it is classified as ‘gifting’, Make sure that you work out how you made the money so that you are gifting. As a consequence, it may mean that you are not required to pay tax as a knock-on or alternatively required to pay a capital gains tax.
Mortgages Online aren’t just about mortgages, we can also offer you a life insurance quote after you’ve finished your mortgage application. Oh, and we’re free to use (so put those credit cards down) We’re so good to you… For everything mortgages, use Mortgages Online.