Children are increasingly relying on their parents or grandparents to help them become a home owner and there are various ways for a parent to help. One of these is a guarantor mortgage.
Some lenders will consider this type of mortgage because the guarantor (parent/grandparent) promises to meet the repayments if the official borrower (the child) is unable to. This situation remains in place until the official borrower is in a financial position to take over the mortgage (with the consent of the lender or once an agreed amount of the mortgage has been paid or after a set time period).
Prospective homeowners must normally meet the mortgage lenders affordability criteria as well as provide a substantial deposit. However, with a guarantor mortgage, the prospective homeowner doesn’t need to have an income: lenders will consider both working or non-working applicants, e.g. a child in full-time education. This could mean a student homeowner with no guaranteed income could achieve a mortgage with reduced monthly payments during their period of study (based on an interest only mortgage with a 20% deposit).
In addition, as the child is the owner and it’s their name that is entered onto the title, there is a saving on stamp duty @ 4%.
Families considering this type of mortgage should carry out a financial health check. Parents need to consider how much they can afford to help out their children without over-committing themselves, e.g. by providing whole or part of the deposit. Children need to consider whether or not they are in a position to take out a mortgage and keep up the repayments (remember, defaulting on payments damage credit ratings and means the guarantors become responsible for repaying the loan).
It’s also a good idea (and lenders may suggest) that both parties obtain separate legal advice to work out some legal ground rules, ensuring any disputes in the future are resolved quickly and easily.
Each lender will have their own specific prerequisites and suitability criteria and research is key to finding the best option.
A mortgage brokerage like Finance Expert Ltd, can support you and your family to navigate the options, so you and your family make the right decision. We can oversee the whole process.
Always remember that, as a mortgage is secured against your home, it could be repossessed if you do not keep up the mortgage payments.
The purpose of this blog is to provide technical and generic guidance, and should not be interpreted as a personal recommendation or advice.