A guarantor mortgage is where the main applicant is unable to afford the mortgage based on their current income and affordability requirements. So the potential borrower asks another person who is normally a close family member to stand as a guarantor for a period of time. The guarantor will enable the deal to go ahead as the lender will base its affordability on the guarantors income and status not the applicants.
Usually the guarantor is required to be a blood relative and agrees to pay the mortgage if the borrower defaults on payments. These guarantees are mostly classed as full liability, which means the guarantor is liable for the entire debt should the borrower default on their payments. In practice if a borrower defaults and the guarantor does not pay the house will be sold and the guarantor is liable for the difference. Often lenders can easily enforce this as they have taken a charge on typically the parent’s house. So although many parents want to help their children on the housing ladder, as things can go wrong with their children’s jobs and relationships it could all end in tears.
However lenders more recently have tried to become more innovative with the Bath Building Society launching its Rent A Room Mortgage, as they are aware that the average first time buyer will spend £64,000 on rent before buying a home. They want to remedy this by introducing a Rent A Room Mortgage. This allows an individual to borrow more by renting out a room and using the rent toward the mortgage payment.
They are aware that often people fail to get the mortgage they want only marginally by failing on income multiples, so they allow the rent to be taken into account to boost this.
To give a working example an applicant earns £26,000 and wants to buy a 2 bedroom property for £200,000. They have a 20% deposit so they need a loan of £160,000. They have approached a few lenders but they are unwilling to lend this amount as income is insufficient. The applicant has a friend who is looking for somewhere to live, and is interested in renting the second bedroom. The friend is happy to pay £400 per month to rent this spare bedroom. The applicant speaks with an adviser who calculates that with Rent A Room Mortgage they would be able to borrow the full £160,000 that they require.
As you can see from the example above this first time buyer is able to borrow much more than they could on a conventional mortgage and in this case not having to rely upon a guarantor to buy the property.
This type of mortgage may not be for everyone but there are now many different types of mortgages that help boost first time buyers ability to get onto the mortgage ladder. Therefore it is worthwhile contacting a Chartered Independent Financial Planner who specialises in mortgages to ensure you get the best deal for you.
Kieron Bassett Dip PFS Cert SMP
29th March 2016
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