A guarantor mortgage can be a great way to help children get on the housing ladder. If they do not have a big enough income or a good enough credit record to be accepted for a mortgage then their parents may be able to help out. With parents being happy to take on some of the risk of the loan, it means that lenders are more willing to lend and may possibly lend more money and at a better rate. However, there are risks and it is worth carefully considering these before signing up.
A guarantor mortgage is usually a child taking out a mortgage with their parents as guarantors. This meant that if the child missed a payment then the parents would be responsible. In the past, the terms were often very strict, with a missed payment meaning that parents had to pay off the whole of the debt. However, these days there are more flexible rules surrounding these.
For example, one current policy will allow the borrower to borrow 100% of the value of the property, meaning no deposit is required and the guarantor will be responsible for the amount that is above 75% of the value of the house. This means that the lender will be able to get their money back should the buyer default on payments by selling the home and any negative equity plus costs will be covered by the amount that the guarantor will have to pay. The guarantor will usually own their own property which will be used as collateral on the loan and this means that they could potentially lose their home too, but only if repayments are not made.
These types of mortgage are quite rare and they are all a bit different. It is important to understand exactly what you are signing up for when you take one on. It could be that there is a better way, perhaps lending the children the money for the deposit, or even just helping them to improve their credit rating and save up for themselves. It is hard watching your children struggle financially and it can be reassuring if they own their own home or get themselves in a position where they can start to buy one. However, you do not want to put your own home or finances at risk by helping them too much and so you need to think hard about whether you are willing to take this risk.
Think about whether both parties will be able to manage during the term of the mortgage. If the mortgage holder has trouble paying one month, will the parents be able to help them out to secure their investment and will the child be prepared to ask for that help if needed. Also consider whether any problems with the mortgage could put a strain on the relationship between parents and child and whether it will be worth it. It may depend on how the relationship is anyway and whether money has ever been an issue before and how it was handled. If it was an issue and it caused tension then it may not be worth getting involved together with finances again. If you have not ever got involved with money together before then you will not know what to expect and it is worth considering how you may feel if things did go wrong, repayments were missed and parents had to pay out money. Mixing relationships and money can be difficult and it can lead to problems. If people cannot easily forgive each other it can mean that their relationship can suffer and they may end up not wanting to speak to each other again, which would be a shame. Not everyone will feel like this, but it is important to think about what may happen and how sensitive everyone is when making the decision.
It can also be difficult if parents are asked to help and they refuse. It may be that they do not think it is a good way to borrow money, they do not want to put their home at risk or whatever. If they do refuse to help, this could also cause problems in their relationship with their child and so it is worth thinking hard before even asking about this sort of loan as it could cause problems right away. Parents could be annoyed at being asked too, they may feel that their child should be able to support themselves and not rely on them or they may feel it is unfair to ask them to put their property at risk. So think hard before even considering this type of mortgage and then think through what might happen when you ask parents about it as well as what may happen if you cannot keep up with the repayments.