Since the mid 90’s house price inflation has been significantly higher than earnings inflation, this has made it more difficult for younger people to get on the housing ladder as their income simply doesn’t stretch far enough to meet lending criteria.
To help overcome this problem some lenders offer a mortgage whereby the payments will be guaranteed by a third party – usually a parent. Such mortgages are called guarantor mortgages.
Requirements of a Guarantor Mortgage
The guarantor must be able to afford the mortgage as though they had applied for it themselves. This means that any debt they have, e.g. their own mortgage, will be taken into account when deciding to offer a guarantor mortgage.
For example, if the guarantor has earnings of £50,000pa and a mortgage of £75,000 and no other debts the lender may decide that the guarantor can afford a £150,000 mortgage (3x Salary), they would then consider the guarantor for a £75,000 mortgage (affordable mortgage = £150,000 less existing mortgage of £75,000 = £75,000 additional borrowing capacity).
If the guarantor is very close to retirement and their income will reduce at retirement then this may preclude them from being a guarantor. Other reasons for being disallowed would be adverse credit history or not being able to prove income.
Typically, guarantors are relatively close to retirement (usually 5-10 years away) and for this reason the lender will want to see that the mortgage applicant will be able to afford the mortgage without the guarantor in the not too distant future (typically 5 years). Professional people (accountants, solicitors, doctors, etc) whose earnings are likely to increase significantly after a qualification period are therefore considered ideal for guarantor mortgages. If your occupation is only likely to achieve inflationary pay awards then it is less likely that you would be considered for a guarantor mortgage.
A person should not enter into a guarantor mortgage without fully understanding the risks. A guarantor will be legally responsible for making payments to the lender if the mortgage applicant is unable to make the mortgage payments for any reason. Missed or late mortgage payments could impact upon the guarantor’s credit rating. The guarantor may also find it difficult to increase their own mortgage borrowing once they act as a guarantor since they would need to be able top demonstrate affordability of additional borrowing as well as the mortgage for which they act as guarantor.