For first-time buyers with a limited credit history, it can be hard to secure a standard mortgage deal because of the affordability checks.
And, even if they do meet the lender’s criteria, sometimes they’re not able to borrow as much as they hoped.
In the past, guarantor mortgages were a popular alternative to bypass these issues, but lenders are increasingly moving away from this kind of product. Instead, many building societies and a few banks offer mortgages that still aim to help those who may struggle to get a good standard mortgage by themselves, often by co-signing the agreement with a family member. But, there are fundamental differences in these alternatives that set them apart from a guarantor mortgage.
Family offset mortgages
This type of mortgage is more commonly offered by building societies rather than banks, and involves the parent or grandparent of the borrower opening a savings account that’s linked to their child or grandchild’s mortgage. The money deposited into this savings account is then deducted from the total mortgage, which in turn means the repayments on the mortgage will be cheaper.
The money set aside in the savings account won’t accrue interest, but the parent or grandparent should be able to access the entirety of their money again once a certain percentage of the mortgage has been paid off. This is typically around 75% and 80% of the value of the property when the mortgage was taken out, so it does mean it could be a few years before the guarantor can regain access to the money.
Flexible family mortgages
There are a number of different kinds of flexible, family-orientated mortgages and each will vary slightly from lender to lender. Some building societies, for example, offer mortgages so long as the borrower has at least a 5% deposit. From here, the family member involved is given the choice between three options.
One of these options involves the family member putting forward a chunk of the equity in their own home as security on the mortgage. But this of course means that should the borrower default on their mortgage repayments, the equity put forward by their family member may be used to cover the gap.
A second option to consider is for the parent or grandparent to put savings into an offset account, similarly to a family offset mortgage. Here, the borrower benefits from paying a reduced level of interest.
A third and final option that may be offered by some mortgage providers is allowing the guarantor to put money into a savings account, usually over 20% of the value of the property. The savings here should be allowed to gain interest, and it acts as security for a mortgage as big as 95%. The savings here mean the borrower should pay a comparatively lower interest rate than is usually available on mortgages as large as this. Again, the same risks apply should the borrower fall behind on repayments in that the parent or grandparent’s savings can be used to cover the costs.
With many of the building societies, it is actually possible to take out a combination of all three of these options.
Family deposit mortgages
This option, offered by a handful of lenders – including both building societies and some banks – involves the parent or grandparent setting aside cash in a special savings account. If you’re considering this option, you should reach an agreement on the length of time the money will be held in the account for, and during this time the cash is used as security against the mortgage.
If the borrower defaults on a payment, money is deducted from the cash set aside in the savings account.
However, if the borrower has no issues with their repayments at all, the cash will remain untouched. This option may be more appropriate in some cases as the savings set aside here will accrue interest. Although the rate may not be the most competitive, it could still be worth considering if you’re sure the borrower will repay on time each month, as it means you’ll be locking your savings away to earn interest for a set period of time.
A note to remember
It’s important to bear in mind that lenders often have different names for similar products in this sector. For example, you could encounter products named Family Guarantee mortgages or Family Springboard mortgages. Often, these fit into one of the three types of mortgages listed above, but may have slight differences depending on the lender’s individual lending policies.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.