Can a guarantor increase the amount you can borrow on a mortgage?
Yes, you can increase your borrowing, as long as you have a family member or possibly a close friend who is willing to act as guarantor.
Essentially, they must be willing to take full or part responsibility for your mortgage, which means they will have to make any mortgage repayments if you are unable to do so.
How does it work?
If you can find someone to agree to support you with a guarantor mortgage, they will need to be named on the title deeds, even though they will not own a share of the property.
But they must agree to sign a legal document that makes them responsible for any mortgage repayments you are unable to make. They will also need to put up some sort of security, like a property or savings. Typically, the savings will be deposited as a lump sum into an account held by the mortgage provider.
They will be unable to draw on this cash for a set number of years, which can be up to five years, or until an agreed amount of the mortgage has been paid off.
Can anyone be a mortgage guarantor?
No. Most lenders prefer an immediate relative, such as parents or a sibling. A few may consider an aunt, uncle, or very close friend, but these are the exceptions, rather than the rule.
There are also eligibility requirements, just like any mortgage.
Preferably, the guarantor will own, or have sufficient equity in a property. Some lenders require a minimum of 30% equity. They will need to satisfy income requirements. At least be able to prove they could take over the repayments if you are unable to.
A good credit rating will help convince the lender that they are a good risk financially.
What are the downsides?
The worst-case scenario is that the guarantor could lose their property or security, if the borrower defaults on their repayment and the guarantor cannot make up the shortfall.
This will have an adverse effect on the guarantor’s credit rating and could well lead to financial hardships.
This is why most lenders will insist that anyone considering acting as a guarantor, seek independent legal advice and financial advice, before agreeing to act as guarantor for a mortgage.
Are there any alternatives?
Yes. Parents could gift a deposit (or part thereof) to help you afford a higher mortgage. The important thing to remember is that it is a ‘gift’ and is not expected to be paid back.
Another alternative could be an offset mortgage. Your parents could deposit a cash lump sum into an account with the lender. The amount held in the account reduces the amount of interest you pay, and that would make the repayments lower.
A family springboard mortgage might be a viable option. Typically, you might put up a 5% deposit, then a family member deposits a further 10% into an account with the lender. This would open up lower interest rate mortgage deals to you.
Taking out a joint mortgage with a family member or friend will allow you to combine incomes and allow you to borrow more.
In closing, because of the potential financial ramifications, it is vital that you speak to an expert and get the best possible advice, to help you make the right decision.