Guarantor Mortgages - are they really the perfect first-time buyer solution?
With house prices through the roof are there any options for first time buyers who are desperate to get on the property ladder? Kate Saines reveals guarantor mortgages might be worth considering.
Picture the scene. You are a first time buyer, and you've just been told by several mortgage lenders that you can only afford a loan of £130,000 to purchase a property.
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The problem is, in the area you want to live there are no properties - unless you want to buy a shed or caravan - that have a price tag this low. Even a one bedroom flat will set you back £145,000.
You would rather not move to another cheaper part of the country as you have a good job, with promising prospects.
So, what do you do? Well, apart from ditching the idea of buying your first home altogether, you could always ask your parents or a close relative for help.
It's a path many first time buyers choose to take. But many find the idea of raiding their mum and dad's savings a difficult step to take. Pride, concern for their parents' finances or even a determination to be independent can make this an unattractive option.
But there is another option in the shape of guarantor mortgages. These are mortgages where the parents, or another close relative, act as a guarantor to the mortgage.
They do not pay anything, they just provide the security that if you default or cannot make repayments they will take on the debt.
Because this relative is probably more likely than you are to be in a position where they can afford a mortgage of far more than £130,000, the lender will see them as a better prospect than you.
So their backing will mean you can get a bigger mortgage, and afford the one bedroom flat, instead of the shed.
The perfect solution?
It sounds like the perfect solution - and in many ways it is.
Richard Morea, technical manager of mortgage broker, London & Country, says guarantor mortgages are a good idea as they provide an additional way of easing first time buyers onto the ladder. "They provide a good helping hand," he adds.
There is, of course, a 'but'. These products are not necessarily an easy option and not everyone will qualify.
Mr Morea explains these mortgages are more of a "short term stepping stone" than a lifetime commitment.
This is because lenders are ideally looking for borrowers who will be able to afford the mortgage on their own in a few years' time.
Mr Morea says a trainee doctor, for example, would be a prime candidate as their income could rise very rapidly.
"It's not a way," he points out, "of borrowing something completely unaffordable."
As well as looking at your potential as a borrower, the lender will also have a set of requirements they will want your guarantor to fit.
They must, for example, be a blood relative in most cases. According to Mr Morea, this was because such a close relationship usually brings with it an element of loyalty. That person would be deemed by a lender to always stand by you.
However, because even a close relative could potentially fall out with you, they will be required to receive independent legal advice to ensure they understand the implications of their responsibilities.
And they will be shouldering a great deal. Many lenders will be looking to make sure the guarantor can afford their own financial commitments as well as their son or daughter's mortgage.
This is especially true for the most common type of guarantor mortgage, which is where the parent or relative secures the entire loan. These are often known as 'full liability' mortgages.
But there is another type of guarantor product. A few lenders provide limited liability guarantor mortgages. This is where the relative guarantees the proportion of the mortgage the borrower cannot afford.
So, if a borrower can only afford a £130,000 mortgage but the property they want to buy is £150,000, their guarantor will provide security for the £20,000 difference.
The Mortgage Works recently unveiled a new range of limited liability products where the guarantor must be able to afford the shortfall, which cannot exceed 30% of the debt.
On top of this they must be able to provide 'tolerance' for a further 10%.
Deals on offer range from two to three year fixed rates of between 2.99 per cent and 6.24 per cent. They all require a minimum deposit of 25%, except one where 15% is required.
Generally the rates and requirements of guarantor mortgages are really no different to standard products.
Lenders are still looking for a healthy deposit and borrowers must still compare which rates and arrangement fees are best for them.
While some lenders offer specific guarantor mortgages, others will offer customers one of their standard deals with the guarantor terms attached.
But London & Country's Richard Morea points out that the type of guarantor deal - whether it is a full liability product, has limited liability, is a specific guarantor mortgage or is one of the lenders' standard products - is not the most important factor when shopping for your loan.
"You should be looking at all the deals available and finding the best deal for you," he says.
So make sure you look at the rate, any fees, whether you can afford the deposit required and what the terms and conditions are like first.
There are, of course, other hurdles to negotiate when applying for a guarantor mortgage. Mr Morea explains that a lot of lenders don't provide them at all, so you might find your marketplace is not as broad as that of other borrowers.
And because these deals are only considered to be a short-term deal, you will rarely find long-term deals.
He adds: "Lenders will be reluctant to commit too long.
"The borrower will be expected to be able to take the mortgage on within a shorter time. But once they do, the wider mortgage market will be open to them," he says.
Halifax, for example, expects borrowers to be able to afford the mortgage payment on their own within a period of three to four years.
There are also limits on who can be a guarantor. If you are hoping to gain support from someone over the age of 65 you might find it hard to find a mortgage. This can rise to 75 in some instances.
Many lenders also want the relative to be a UK resident.
The guarantor themselves faces many potential pitfalls. They are at financial risk if they cannot keep up repayments, and they may also be restricted from buying a property themselves if they are charged with the burden of their relative's debt.
What's more, if the guarantor and borrower fall out it is the guarantor who will be landed with the biggest legal implications.
Nationwide demands its guarantors receive independent legal advice from a different solicitor to the one being used by the borrower and also take responsibility for all costs incurred from doing so.
Such a big commitment should be taken seriously and Richard Morea says: "Make sure you and your guarantor do the groundwork to make sure you know what's involved."
But despite all the potential barriers and pitfalls involved in taking out this kind of mortgage, there are plenty of solutions and advantages.
If your guarantor thinks they cannot afford the financial responsibility on their own, some lenders allow two guarantors to come on board.
Cheltenham & Gloucester is one such lender, although it does state that two guarantors is the absolute maximum and they must be under 65.
And there are also variations for parents who don't want to shoulder too much responsibility. Lloyds Banking Group, for example, offers the Lend a Hand scheme.
This is where the borrower finds someone to put their savings up as security on their mortgage.
Lloyds asks for savings equalling 20% of the property value. These savings are put into an account at the bank and earn interest while the borrower benefits from lower mortgage rates.
What's more this scheme only requires a five per cent cash deposit.
And despite some lenders recently axing their guarantor products, other providers seem to remain committed to the market.
According to the Co-operative Bank, its guarantor products are a hit. James Hilton, head of mortgages at the bank, says: "Our guarantor mortgages have always proved popular with first-time buyers, as they enable people to reach that often difficult first rung of the property ladder."
And Lloyds TSB says its product allows parents to help without denting their finances. Its commercial director of mortgage, Stephen Noakes, says: "It lets parents use their savings without actually having to write their children a cheque."
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