What is a guaranteed mortgage? (A 3 point Guide)

What is a guaranteed mortgage?

Guaranteed mortgages are mortgages where there is a guarantor on the mortgage.

With a guaranteed mortgage they guarantor essentially guarantees the mortgage and if the borrower defaults they could potentially lose any assets they have used to guarantee the mortgage including their home.

Guaranteed mortgages are not the same as the help to buy mortgage guarantee which is now closed.

A guarantor will offer their assets or savings as collateral for the mortgage and this in many cases allows the mortgage lender to find the borrower more creditworthy and could potentially see the borrower offered better interest rates.

With many guaranteed mortgages you could potentially borrow up to 100% and in many cases, the maximum you may be able to borrow on a guaranteed mortgage is £500,000.

Guaranteed mortgages also mean that any negative marks that have come about due to the borrower defaulting may also damage the credit score of the guarantor.

Guaranteed mortgages are usually for first-time buyers who cannot raise a mortgage deposit and need a 100% or 95% loan to value on the mortgage or for borrowers with bad credit who need bad credit mortgages which allow guarantors.

Bad credit could be things such as:

A CCJ

An IVA

A debt management plan

A default

A bankruptcy

A home reposession

Who are guaranteed mortgages suitable for?

No credit history or a low score

If you have a bad credit score or no credit history at all then you may want to consider a guarantor or guaranteed mortgage as mortgage lenders may be willing to lend to you if you have a guarantor for your mortgage. If you have bad credit, you should consider building your credit score and history.

Low income

Most mortgage lenders decide what they will lend to you based on their income multiples. A mortgage lender may have an income multiple of 3.5 or 5 etc.

If the mortgage you are after is beyond what the mortgage lender may be willing to lend to you based on your income multiple then you may be able to get the mortgage lender to lend more to you if you got a guarantor and chose a guaranteed mortgage.

Small mortgage deposit

If you have a small mortgage deposit then you may not be able to meet the mortgage lenders eligibility criteria and hence they may not be able to lend to you. If you could get a guarantor to obtain a guaranteed mortgage then you may find mortgage lenders who may be willing to lend to yo even with a small mortgage deposit.

Most mortgage lenders have a strict loan to value criteria and unfortunately will not give you a mortgage offer if you fall beyond their loan to value criteria.

You could also get help from the government if you can raise a bigger mortgage deposit.

You may be able to get some home buying government schemes for first-time buyers and home movers which could increase your mortgage deposit or reduce the total cost of purchasing the property.

They are:

• Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
• Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
• Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
• Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
• Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
• Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
• Right to buy– allows you to buy your home at a discount price.
• Preserved right to buy– same as above.
• Right to acquire– similar to the above.

Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.

The fact that you may fit the criteria of someone who may want to consider a guaranteed or guarantor mortgage doesn’t mean this is necessarily the best mortgage product for you.

You may want to seek independent advice from a mortgage broker.

Types of guaranteed mortgages:

Below is a list of guaranteed mortgages which are currently available on the market.

Family springboard mortgages

They are a certain type of mortgage known as a family springboard mortgage, they include mortgages from lenders such as the Barclays family springboard mortgage, the lloyds lend a hand mortgage or the post office family link mortgage.

The mortgages above require your family member to put their savings away for a fixed period and this is used as your mortgage deposit.

Offset mortgages

There are also offset mortgages where a guarantor could place funds in a savings account and this affected the amount of interest you may have to pay on your mortgage.

The mortgage lender will essentially charge you interest on your outstanding mortgage minus your current savings.

Property

You could also use the property as a form of a guaranteed mortgage. With this, the equity in your property will be used to guarantee a mortgage for a borrower.

If the borrower defaulted you may then have to repay that portion of equity back to the mortgage lender.

You may also have to seek the permission of the mortgage lender who has a first charge mortgage on your property before using it to guarantee another mortgage.

Who can guarantee a mortgage?

Anyone can guarantee a mortgage but the mortgage lender will likely want to see some established relationship between you (the borrower) and the guarantor. So friends, families etc should be fine.

What does it mean to guarantee a mortgage?

Guaranteeing a mortgage essentially means providing a form of security that if the mortgage isn’t paid then the lender can acquire that security.

This could be assets, savings etc.

Can I get a 100% mortgage?

Yes, there are a few mortgage lender which offer 200% mortgages. Some include:

the Barclays family springboard mortgage, the lloyds lend a hand mortgage or the post office family link mortgage.

Use a mortgage broker for your mortgage in principle

You may want to use an independent mortgage broker to help you get a mortgage on your new home.

Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.

This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.

A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.

After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. 

This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application. 

Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.

This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.

It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.

If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.

Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.

They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.

This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.

If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.

You can also contact the debt charity “Step Change” if you are in debt and need help.