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
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.