A guarantor mortgage is a mortgage where a parent of a family member offers his home or savings as a security for the loan. One of the advantages involves that the person who is looking to buy a property will more likely get a mortgage or be able to borrow the money.
On the other side, the guarantor will be responsible for any missed mortgage payments, which can create a rift among family members. But, let’s discover how does this work and what are the types of guarantor mortgages.
How does guarantor mortgages word?
With this kind of mortgage, both you and your guarantor are responsible for the payments. For instance, if the conditions during the mortgage change, let’s say you get a salary increase so that you can afford monthly installments, then the guarantor will be released from his responsibility.
The guarantor can also be released if you have paid off a certain amount of your mortgage, or after a specific period, for example, ten years. Nowadays, the banks can offer you to borrow up to 100% of a property’s value. However, in this case, a family member must guarantee the amount above 75% of the value of the property.
Usually, a family member will offer his property or home as collateral.
What happens when you can’t pay your mortgage?
When you take a traditional guarantor mortgage, your parents, or family members are responsible for paying the installments and in the worst case scenario, they can lose their property to cover your debt.
Let’s look at how this can turn out. For example, if you owned a bank a £200,000 and you repaid £180,000, but you are no longer able to cover the payments, then the bank will sell your property, and your guarantor will be liable for the remaining £20,000.
If the guarantor can repay the debt, then his home will be processed as well.
What are the types of guarantor mortgage?
There are two main types, which include the whole guarantor and the shortfall guarantor. However, every lender is different regarding his requirements. In most case, the lender requires from the guarantor to afford the entire loan, while the small amount is only requesting from the guarantor to provide the shortfall.
The whole loan guarantor – this is the most requested criteria. The reason for this condition is because lenders are trying to reduce the risk and from the guarantor to provide the cover the entire loan. This means that your parent or family member has to prove that he can cover or afford your mortgage.
For instance, if you require a mortgage of 140k and you can only afford 110k, then the guarantor will need to have a substantial income the cover the whole amount, not just 30k. These conditions might not work for some guarantors, especially if the lender takes into account their financial obligations, such as their mortgage or other credit commitments.
Shortfall guarantor – even though it’s rare, it’s still possible with some lenders. In this case, the lender requires from the guarantor to cover the surplus or the remaining amount that borrower can’t afford. Let’s go back to the previous example, with a shortfall guarantor mortgage; the guarantor will only cover the remaining 30K and clear your debt towards the bank.