Guarantor Mortgages

by Mark Johnston

Securing a mortgage these days is much harder than it used to be, especially for first time buyers due to:

–          loans with out a deposit, these practically vanished during the credit crunch

–          lenders are offering smaller mortgages and rejecting a higher percentage of applicants

–          interest rates for first time buyer deals do not reflect the low base rate

–          deposits are now required in excess of 10%, which generally requires 5 years worth of savings

The 100% mortgage is back! Well that is as long as a family member is willing to guarantee anything above 75%. Cue a call on the bank of mum and dad.

So therefore as first time buyers continue to struggle to get on to the property ladder, lenders are becoming more adventurous in the lending stakes, which is why there has been an increase in the number of companies offering ‘guarantor mortgages’.

A guarantor is someone who is willing to guarantee mortgage payments. This can be anyone from a parent, close relative or even a long standing friend. The guarantor does not have to part with any money that is unless the potential borrower fails to make their repayments.

Therefore a guarantor is however at financial risk and this could mean that they could even lose their home if the potential borrower can not make their repayments.

Most lenders require a guarantor to be no more than 60 years old at the time of the mortgage application, although this can be altered depending on certain situations.

This is quite prevalent considering the fact that many first time buyers are increasingly turning to their grandparents rather than their parents for financial help. Research has found that 1 in 10 young people are now turning to their grandparents for help.  This is due to the fact that like many other banks in the UK the ‘bank of mum and dad’ is struggling in the economic downturn.

Guarantors are also put through the same financial assessments as the person taking out the loan. Therefore, a guarantor’s income (minus any of their own financial commitments) must be able to cover the entire mortgage.

The Co-op bank is the latest to launch a new version of a product which enables first time buyers to bypass the problem of not being able to borrow enough by themselves to buy a house. The guarantee lasts until the borrower is earning enough to cover the whole loan at which point the guarantor is released.

The rate for this deal is a hefty 6.29% which is fixed fro 5 years.

Other lenders that offer guarantor mortgages are the HSBC who offers a tracker mortgage with a rate of 2.39% and also the Nationwide building society who offers a tracker mortgage at a rate of 2.40%.

Therefore if parents can not help with a lump sum for a deposit they may be prepared to guarantee a mortgage. The important thing though is that the potential borrower can afford all the repayments, so they do not default, otherwise it will not just be the bank that comes after them!

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