Guarantor Mortgage – A Mortgage with a Financial Guarantor

In the United Kingdom, there are several ways to obtain a better mortgage interest rate. The key to a more attractive mortgage offer is to reduce the bank’s risk, which can be achieved, among other things, by improving your creditworthiness, making a larger deposit, or taking advantage of an appropriate assistance programme. However, many people forget about another way, which is to find a guarantor — thanks to this post, you will learn how a Guarantor Mortgage works.

Credit risk assessment

Whether you are granted a mortgage and on what terms depends on the level of risk incurred by the bank. This is called credit risk and determines the likelihood of the customer being able to repay the mortgage. As a rule, the higher the credit risk, the worse the mortgage terms will be — these include, for example, the interest rate, the flexibility of the agreement or the maximum mortgage amount.

The most important factors that define the risk for the bank are the customer’s affordability and the amount of their own contribution. The former is calculated based on an assessment of the borrower’s financial situation and shows how much credit they will be able to repay. The deposit, in turn, directly affects the LTV ratio of the mortgage, which shows the ratio of the loan amount to the value of the property. The lower this ratio, the better the customer’s overall creditworthiness.

Understanding the nature of credit risk is key to understanding how a Guarantor Mortgage works. This product allows you to reduce your external credit risk without changing your financial situation or using more of your savings for a deposit. Using a Guarantor Mortgage allows a person with very problematic creditworthiness to purchase a property or obtain better mortgage terms.

Guarantor Mortgage

A guarantor mortgage is a special mortgage product in which another person undertakes to repay the debt if the main borrower is unable to do so. This person is called a guarantor because they guarantee the mortgage with their assets.

The guarantor must voluntarily agree to this form of security, as by guaranteeing the mortgage they assume financial responsibility for it, but do not become a co-owner of the property. They have no rights to the purchased home and cannot make any claims in the event of a dispute.

Due to the unilateral benefit of such an arrangement,** the guarantor is usually a parent, grandparent or other close family member who selflessly helps a relative to purchase a property**. Although legally anyone can become a guarantor, in practice most banks limit this role to immediate family members, for fear of more likely conflicts between the parties.

Scope of protection

It is worth knowing that the guarantor does not have to be liable for 100% of the mortgage. Although this is the basic option, which provides the greatest benefits, it is possible to agree on a smaller scope of financial liability. This may be:

• The portion of the initial mortgage amount specified as a percentage;

• The portion of the mortgage above a specified LTV.

The second option may seem complicated, so let us explain it with an example:

Let us assume that the value of the house is £300,000 and the borrower’s own contribution is £30,000. In this case, the LTV of the mortgage is 90%. In this particular situation, the bank considers 80% to be a safe LTV.

In order to increase creditworthiness and reduce the bank’s risk, the borrower uses the help of a guarantor who declares responsibility for between 80% and 90% of the LTV, i.e. another £30,000. This makes it possible to obtain the expected mortgage.

How does a guarantor mortgage affect credit risk?

The presence of a guarantor radically changes the borrower’s creditworthiness, as it greatly reduces the credit risk. As a result, the borrower can choose a mortgage that would previously have been unavailable to them or obtain much better terms compared to a mortgage without a guarantor.

However, this does not mean that the borrower will be exempt from a creditworthiness assessment. Their financial situation will be analysed, and their own contribution will still be important. The result of such an assessment then forms the basis for presenting an appropriate mortgage offer, and the presence of a guarantor only improves it.

The degree of improvement in creditworthiness depends solely on the guarantor’s financial situation. The better it is, the better the terms the main customer will be able to obtain. Of course, if the guarantor has a similarly low creditworthiness as the borrower, their presence will not bring about much change in your situation.

Guarantor Mortgage in practice

If someone in your family agrees to be your mortgage guarantor, they must accompany you when you apply for the mortgage. The bank will then assess their creditworthiness and present a guarantee agreement, which your guarantor will have to sign in person. It is also very likely that the bank will require independent legal advice to ensure that the guarantor fully understands all the legal consequences of such an operation.

There are several interesting aspects that the bank analyses in a guarantor. Firstly, the bank checks whether they own other properties. This is one of the main elements of assets that are important to the lender, as it constitutes a tangible asset which, as part of the total assets, is a real security for the bank. It must, of course, be largely free of mortgage encumbrances and have a documented value. Analysts also pay attention to the legal status and title deeds of the property to ensure that there are no inaccuracies that would reduce its value. There is nothing to prevent the guarantor from continuing to repay their mortgage, although this will obviously affect their creditworthiness and the bank’s assessment.

Another factor is the guarantor’s age. Banks that agree to the presence of a guarantor often require that they be of a certain age on the date the mortgage matures. Typically, the upper limit is around 70-75 years of age. This means that if you want to take out a 25-year mortgage, the guarantor should be no more than around 50 years old.

Release of the guarantor

**Some mortgage agreements allow the guarantor to be released from financial liability once certain conditions are met. **If this option is available, it is usually when the borrower’s financial situation is so good that the likelihood of them repaying the mortgage on their own is very high. In addition, the mortgage repayment history must not show any delays or arrears — late repayments reduce the bank’s confidence and may cause reluctance to release the guarantor.

Even if the mortgage agreement does not allow it, the guarantor can always be released when remortgaging. Here, the rule is similar — if the borrower is able to take out a new mortgage on their own on favourable terms, they will no longer need a guarantor.

Alternatives to Guarantor Mortgages

There are several alternative ways to obtain credit or improve the attractiveness of possible terms and conditions that use some form of guarantee.

Joint Borrower Sole Proprietor Mortgage (JBSP)

A Joint Borrower Sole Proprietor Mortgage is a combination of a Guarantor Mortgage and a Joint Mortgage. In this arrangement, two (in rare cases more) persons are listed in the mortgage agreement, who are jointly responsible for the mortgage, but only one of them becomes the owner of the property. This results in a much higher credit rating, which allows for a larger mortgage or better terms.

Although the co-borrowers are jointly responsible for the mortgage, in practice they decide among themselves who will pay the instalments — the bank does not give specific guidelines, and the only important thing is that they are paid on time. As a result, one of the borrowers may be completely inactive until there is a problem with the repayment of the instalment. Then they should settle the payment if they want to avoid the consequences of being responsible for the mortgage.

A Joint Borrower Sole Proprietor Mortgage may seem quite similar to a Guarantor Mortgage, but in reality it works on slightly different principles. In some respects, it is much more flexible than a Guarantor Mortgage, making it a good alternative.

Family deposit mortgage

**A family deposit mortgage is a type of mortgage in which the borrower’s family deposits a certain amount of money **(usually 10%–20% of the property value)in a bank, providing additional security for the mortgage. This deposit is not used to pay for the property or as a deposit, but is simply frozen for a specified period (usually 3-5 years).

The owners of the funds do not become co-borrowers or co-owners of the property — they only provide money which, in the event of repayment problems, can be withdrawn by the bank as part of the recovery of outstanding funds.

Family offset mortgage

A Family Offset Mortgage is a type of mortgage with an offset account that is held by the borrower’s family. Savings are paid into this account, which has two main functions:

• They provide additional security for the mortgage;

• They reduce the amount on which interest is calculated.

This means that a Family Offset Mortgage not only allows you to obtain better terms at the outset (depending on the initial amount of funds), but also reduces your mortgage payments:

If the mortgage amount is £250,000 and the family’s savings in the offset account are £30,000, the mortgage interest is calculated on the amount of £220,000.

If the borrower repays the instalments regularly, their family does not lose the deposited funds — they are only frozen for the appropriate period of time. A Family Offset Mortgage is a very interesting alternative that offers double benefits for the borrower.

Mortgage guarantee scheme

It is worth knowing about the government programme known as the Mortgage Guarantee Scheme. Although you will not encounter it directly when taking out a mortgage, it often makes it easier for people with low creditworthiness to obtain a mortgage. It works on the basis of agreements between the government and banks, under which the bank guarantees the mortgage from the part above a specified LTV (similar to what a regular guarantor can do by securing part of the mortgage). Participation in the programme is automatically included in some mortgage offers, making them more advantageous.

Summary

A guarantor mortgage is a type of mortgage that requires a guarantor to secure part or all of the mortgage with their assets. This is usually a close relative, such as a parent or grandparent. Thanks to the guarantee, which reduces the credit risk, the borrower can count on better mortgage terms. In most cases, the bank allows the guarantor to be released when the borrower is able to meet the obligation on their own without exposing the bank to losses.

What happens if the guarantor dies?

If the guarantor dies suddenly during the mortgage period, the bank submits a claim to the executor of their will. The obligation then passes to the deceased’s estate and must be settled.

Does being a guarantor affect your credit score?

Information about becoming a guarantor is immediately forwarded to credit bureaus. The very fact of signing the agreement reduces your credit score, and if the borrower fails to make their repayments on time, this will have a very negative impact on both their score and that of the guarantor.

Can a Guarantor Mortgage be combined with a Gifted Deposit?

In practice, there are no contraindications to combining these two mechanisms. However, it is worth making sure that the bank’s policy allows it.