Just as one door shuts another one opens. Recently, Halifax and Cheltenham Gloucester have said that, because demand is low, no longer will they offer guarantor mortgages. Hot on the heels of this announcement, the Mortgage Works, the specialist lending arm of Nationwide Building Society, have announced that they are entering the market.
A guarantor mortgage is one in which parents, or a close family member, guarantee payment of a mortgage, if the applicant defaults. The guarantee is required because unlike most borrowers the applicant’s income does not quite meet normal lending criteria so they need a leg up, as perhaps their income will fit perfectly in a year or two, as they may be on an incremental scale with their job or paid off loans by then.
Although with most guarantor mortgages the parents name does not have to appear either on your mortgage agreement, or the property deeds, they will still be jointly and separately liable for the loan. Also, the lender has to be convinced that the applicant parents can service the whole debt if they default. In theory, this should not be too much of a problem for most parents, as the amount a first time buyer wants to borrow is often less than a £100,000 in our area. However, lenders are quite strict and they are looking at the family members being able to service all their debts comfortably, as well as the new mortgage.
In addition, if the parents are relatively near to retirement, lenders will want to look at the income they receive in retirement. They will then stress test this against the mortgage payments to ensure that not only can they afford the mortgage now, but also when income typically drops in retirement.
Although other guarantor mortgages exist, I suspect there is a very low take up rate, with lenders experiences being similar to the Halifax and Cheltenham Gloucester. However, I believe that this is not due to a lack of demand, but because the parents can’t meet the lenders strict criteria.
As mentioned earlier, the Mortgage Works have entered this market and maybe they can give this segment of the mortgage market a shot in the arm, as their approach is innovative. They have launched limited liability deals to guarantee a smaller portion of the mortgage. With this product the applicant must be able to afford 70% of the loan when applying. The guarantor must then be able to afford the shortfall, which will be a maximum of 30% of the debt plus a further 10% for tolerance. The interest rates they charge are reasonable for the risk involved with lowish arrangement fees and a maximum loan to value of 85%.
Another option for the parents who want to help their children, is to join the mortgage. The Coventry Building Society offer family mortgages that will allow their children to borrow more, provided the family are sure, as a group, they can afford the repayments. The maximum level of borrowing is 7 times the children’s income with loans up to 85% of the value of the property.
Also, The Coventry allow mortgages to extend to age eightyfive, so a sixty year old joining the mortgage could take it out for a term of twenty five years. By being able to extend the term it makes repayments more affordable.
Overall, I believe these deals could give the first time buyer and families more options. But as always it is worth taking advice from an independent financial adviser who specialises in mortgages to ensure all options and risks are discussed. Kieron Bassett Financial Services have two Independent Financial Advisors. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.
Kieron Bassett CertPFS
17th March 2010
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