Guarantor mortgages and becoming increasingly common due to the increasing gap between house prices and earnings and stricter lending criteria. Many first time buyers are therefore looking to parents and relatives to act as guarantors to the mortgage.
Interesting Fact
If you divide the average house price by the average earnings, you get the ‘Average House Price/Earnings ratio,’ which is a key indicator of how much people are stretching themselves to get on the housing ladder.
The long-term average has been around 3.5, but there have been peaks and troughs, which have all coincided with housing booms and busts. For example, in 2017/2018, it peaked at around 5.5, and the average age of a first-time buyer is now over 33!
Guarantor mortgages are a great idea if you firstly have parents that have some spare money, and secondly if they trust you to pay back your mortgage. Depending on what type of guarantor mortgage you take out, in an ideal world, your parents need not be liable for any of the mortgage payments if you stick to your side of the deal and keep up with repayments. However, guarantors can play a vital part in the mortgage process should you loose your job and can’t make the repayments.
How A Guarantor Mortgage Works
With a guarantor mortgage, a parent or close family member can either cover the shortfall in the mortgage needed to cover the borrower’s income or can cover the full mortgage amount. By covering the mortgage, or part of it, the guarantor is liable to make payments if the principal slips into arrears or defaults. For instance, if you earn £60,000 you might borrow £90,000. If the property you want to purchase is worth £130,000, there is a shortfall of £50,000 that the guarantor would cover. The mortgage lender will assess the guarantor’s income, current mortgage and other financial commitments to ensure that they can cover the loan amount.
Who Are Guarantor Mortgages Useful For?
A guarantor mortgage is particularly popular with students who want to get on the property ladder as long as parents can afford to repay the loan. The parents would need either to show that their own mortgage is near to finishing or they have sufficient income. They are able to hold the mortgage in their child’s name, acting as guarantors, or they can buy the property as a buy-to-let. Their son or daughter could then rent out rooms and the revenue generated should pay the mortgage.
Guarantor mortgages can also be ideal for graduates. Some banks will offer loans based on the prospect of rising income over the next few years, and much of the marketing is aimed at young professionals.
Many mortgage lenders now offer guarantor mortgages. As with any mortgage, it is important to compare rates, fees, and other features. Financial advice should be sought before committing to a guarantor mortgage.
