Using a guarantor
If you cannot raise enough money for a deposit, or you have a poor credit history, one way you may be able to get a mortgage is with the help of a guarantor.
Read more about first homes
What does a guarantor do?
A guarantor offers their own assets as collateral for the loan – for a mortgage this will mean they offer their house as collateral. Usually parents offer to be guarantors for their children to help them get into their first home, but anyone can be a guarantor so long as the lender is willing to have them.
Helping out the kids
Parents guaranteeing their child’s mortgage is a big step to take as your folks are liable to pay if you default on your loan – this could mean losing their home. You should be absolutely sure that you will be able to meet mortgage repayments and take steps to limit the damage if things go wrong.
You can protect your parents’ assets by doing a number of things:
- Limiting the extent of the guarantee, which means the bank only uses a percentage of your parents’ asset as collateral – and thus can only take that percentage if you don’t meet your repayments. That limit is usually set at 20%.
- Taking out full mortgage protection insurance so if you lose your job the mortgage still gets paid.
- Paying a portion of the mortgage off quickly, building your own equity fast. This can mean your mortgage payments are quite large at first, but with capital gains you can release your parents’ assets in five years if you work at it.
- Both you and your parents should get independent legal advice so you’re all going into the arrangement with your eyes open.
It can be a risky move to be a guarantor but if it works out it is a great way for parents to help their children buy a house without having to give a lot of money.