Building your Tembo Plan
Guarantor mortgages explained.
You will have heard of a first-time buyer mortgage, perhaps also a remortgage, but what about a guarantor mortgage?
A guarantor mortgage is a handy but little-known type of home loan that enlists the help of family or friends. They agree to support your mortgage application in one way or another, bringing you several steps closer to your homeownership dreams. And let’s face it, if you’re a first-time buyer right now you need all the help you can get.
Last month didn’t just usher in the spring equinox with its longer nights and warmer days. Halifax reported that March also brought with it the highest UK average house price. Ever. As seasoned homeowners raced around the property market trying to cash in on the government’s stamp duty holiday hoping to save up to £15,000, they managed to push house prices skywards by 6.5% to an average of £254,606.
But if it sounds like that dream of one day getting a foot on the property ladder is sliding out view, think again. Enter guarantor mortgages.
What is a guarantor mortgage?
Simply put, a guarantor is someone who is willing to help you get on the property ladder. There are lots of options for the modern day guarantor. These range from signing an agreement to step in to repay the balance of your debt if you default, to the next generation of guarantor mortgages, where existing property or income is used to increase the buyer's affordability.
With a traditional guarantor mortgage, the guarantor signs a contract that makes them legally responsible for your debt and will be asked to offer up some collateral to the mortgage lender. This is either savings or a chunk of their own equity that they have built up in their home to cover your debt if the need arises. There is a generally a time limit for the bank to hold these as security. As long as you pay your mortgage on time, the guarantor’s security is released when the agreement expires. But, if life gets tough for you, the bank comes looking for them.
Note that the guarantor is only asked to repay your debt if your home is repossessed. Were this to happen, the bank puts the house on the market to sell and the money from the sale goes towards clearing your mortgage. If there's a shortfall, that's when the guarantor will be asked to pay up. It sounds dramatic, but in truth banks try all sorts of measures to help you with your repayments before it gets that far. Remember, it always pays to ask for help instead of suffering in silence.
So it's safe to say that the early version of guarantor mortgages were pretty basic. But thankfully, times have changed. New products can offer as many benefits to your guardian angel as they do to you. We'll come to those benefits in a bit.
How would a guarantor mortgage help?
Saving for your first house deposit is tough. With house prices at record highs and savings rates at an all-time low, the cards are stacked against young buyers.
In the space of a year, the average deposit needed by a first-time buyer went up by £12,000 to £59,000 and in the capital, it is even worse. London's first-time buyers put down an extra £20,000 compared to last year, taking the average deposit in London to an eye-watering £132,685.
Here's where the guarantor mortgage comes in. With support from your family or friends, you can buy with a much smaller deposit saved, or even none at all.
It's worth noting that new buyers aren't the only ones who can benefit from the help of a guarantor. If you're moving up the property ladder because you've outgrown your used-to-be cosy but now cramped one-bed apartment, you can still benefit from the help of a guarantor.
Let's run through what's available for would-be buyers and movers then.
Family springboard mortgages
First, let's look at springboard mortgages. These are on offer at a few lenders, but here we'll run through the Barclays offering.
To get you on the ladder, Barclays will require your family member or friend to deposit 10% of the purchase price into a special savings account for five years. Buyers can choose to put down a deposit of up to 9.9%, or can avoid a deposit altogether. After five years, providing you're on track with your payments, Barclays return your guarantor's savings along with any interest that has accumulated in that time. The drawback here is that your guarantors can't access their hard-earned savings for a considerable amount of time. This could leave them in a sticky situation if unexpected expenses arise, or they might miss out on an exciting opportunity because their money is tied up.
It also makes the big assumption that your guarantor has 10% of your purchase price available in cash. Following the latest House Price Index, that's a bill of over £25,000 for your guarantor. So, I'm sure we can all agree that springboard mortgages aren't for everyone.
Joint borrower sole proprietor
Another solution is to use a new type of guarantor agreement called a joint borrower sole proprietor mortgage. That’s a bit of a mouthful, so let’s call it a JBSP mortgage.
This allows your parents or helpers to join you on the mortgage to boost* the amount of money the bank will lend you. They agree to be jointly responsible for the payments (that’s the joint borrower bit) without being listed on the property deeds. That makes you the sole proprietor and they avoid the hefty stamp duty bill when they move home. There are other deals where parents can join their kids on the actual mortgage itself, but the big stinger here is that your mum and dad will be named on the property deeds with you. This means that they have inadvertently become second homeowners. The next time they move house and buy a new one, the tax man will charge them more in stamp duty.
JBSP mortgages are mostly offered by smaller building societies, but Barclays and HSBC are flying the flag for the big banks.
It's clear the guarantor mortgage has come a long way since the days of a no-frills legal agreement. But there’s a better way still.
The next generation of guarantor mortgages
At Tembo, we offer an accessible alternative to 100% mortgages, similar to the family springboard mortgage or guarantor mortgage, but with some added benefits.
To use a Tembo deposit boost, the only requirement is that you have family or friends who own a property and want to help you own yours. And you’d be surprised how much people do want to help, if you ask. Research shows that three quarters of parents whose income had taken a hit during the pandemic said they were still determined to support their kids’ property buying dream.
So here's how a Tembo boost works
Tembo brokers two mortgages; a first-time buyer mortgage for you and a mortgage for your helper (we like to call them homeboosters).
The money raised by the homebooster’s mortgage is the cash you will use for your deposit. The balance of the homebooster loan does not have to be repaid until they sell their property and they can choose from plenty of flexible deals from a two-year fix to a lifetime mortgage.
A deposit boost is the most accessible mortgage on the market. You don’t need to have pots of cash lying around to chuck into a guarantor savings account or be high earners so they can join you on the mortgage. Instead homeboosters unlock the equity in their own home to help out, which research shows is more than £125,000 for the average over 50s homeowner.
By using this equity, first-time buyers can put down a bigger deposit which means they could unlock cheaper interest rates.
Finding out more is easy. Use our online guarantor mortgage calculator and in under five minutes you'll know if you're eligible to use a deposit boost. Once we’ve given you the thumbs up, we’ll get you booked in for an introductory call with one of our experts and get you on your way. We know a deposit boost isn't for everyone, too. So if you're interested in the JBSP or regular guarantor mortgage, we can help too!
Words by Sam Partington
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