One common obstacle for first-time buyers, or those with less-than-ideal credit histories, is the deposit. This is where guarantor mortgages come in, offering a potential lifeline but also carrying significant weight. There are considerable pros and cons to consider for both the borrower and the guarantor before taking the plunge.
What exactly is a guarantor mortgage?
This is a mortgage where another person (the guarantor) agrees to be financially responsible for the loan if you, the borrower, can't meet your repayments. They're essentially promising the lender they'll step in if you stumble. This additional security could make it easier to qualify for a mortgage, potentially with a larger loan amount or a lower interest rate.
Benefits for the borrower:
- Potential higher chance of mortgage approval: With a guarantor's backing, you become a less risky proposition for lenders. This can be crucial if you have a small deposit or a blemished credit score.
- Potentially larger loan amounts: The guarantor's income and assets can be factored into the affordability assessment, potentially allowing you to borrow more than you might be able to on your own.
- Potential lower interest rates: Some lenders offer more competitive rates for guarantor mortgages, further reducing your borrowing costs.
However, there are also drawbacks to consider:
- Financial burden: If you default on your repayments, the responsibility falls squarely on your guarantor. This can strain relationships and put their own financial security at risk.
- Impact on guarantor's credit score: If they have to step in and make payments, it could damage their credit history, making it harder for them to borrow in the future.
- Emotional stress: The whole process can be emotional, with both borrower and guarantor feeling pressure and potential guilt.
For the guarantor, the risks are even greater:
- Financial liability: They have to pay the entire loan amount if you can't repay it. This could mean losing their own home or savings.
- Limited legal protection: Guarantors have limited legal protections, and lenders can come after them directly if you default.
- Impact on future borrowing: As mentioned, their credit score could take a hit, affecting their ability to borrow for their own needs.
Remember, a guarantor mortgage is a serious commitment. If you're considering this path, get in touch with us today at info@justmortgages.co.uk or call 0345 2185211.
Just Mortgages is a trading name of Just Mortgages Direct Ltd, which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited which is authorised and regulated by the Financial Conduct Authority.
Approved by The Openwork Partnership on 21/12/2023