How Mortgage Guarantor Schemes Can Unlock Your Dream Home

For countless aspiring homeowners, the path to property ownership can seem like an uphill battle. The substantial deposit often required to secure a mortgage can be a formidable obstacle, particularly for first-time buyers navigating the complexities of the housing market. However, mortgage guarantor schemes have emerged as a beacon of hope, offering an alternative pathway to realizing the dream of homeownership.

These innovative schemes involve a third-party guarantor, often a family member, who pledges to cover the borrower's mortgage payments in case of financial hardship or default. By providing this added layer of security, guarantor schemes enable lenders to offer mortgages to individuals who may not have the means to accumulate a significant deposit, thereby reducing the perceived risk associated with such loans.

Understanding Guarantor Schemes

A guarantor mortgage scheme is a formal arrangement in which a guarantor agrees to guarantee the borrower's mortgage payments. This commitment from a financially stable third party gives lenders the assurance they need to extend mortgage financing to individuals with smaller deposits than typically required. By mitigating the risk of default, these schemes allow first-time buyers and those with limited savings to enter the property market.

Eligibility and Requirements

To qualify for a guarantor mortgage scheme, the borrower must have a guarantor who meets specific criteria set forth by the lender. Typically, the guarantor must demonstrate financial stability and possess either substantial equity in their property or significant savings that can be pledged as security against the loan. The eligibility requirements may vary among lenders and specific guarantor schemes, so prospective borrowers must thoroughly research and understand the criteria.

Types of Guarantor Schemes

Both government-backed and private guarantor schemes are available, each with its unique features and benefits:

1. Mortgage Guarantee Scheme:

The government's Mortgage Guarantee Scheme, introduced in the 2021 Budget, aims to increase the availability of 95% loan-to-value (LTV) mortgages for buyers with smaller deposits. This initiative was launched to address the reduction in high LTV mortgage availability due to the economic impacts of the COVID-19 pandemic and the scheme will be open until 30 June 2025. It provides lenders with a government guarantee on the portion of the mortgage over 80%, effectively reducing the risk for lenders and encouraging them to offer 95% LTV mortgages to more borrowers. This guarantee applies to both first-time buyers and home movers, making it easier for individuals to secure a mortgage with a small deposit. Under the scheme, loans eligible for the guarantee must fall within the 90% to 95% LTV range, ensuring that borrowers who can only afford a small deposit (5-10% of the property value) still have access to mortgage products.

Lenders have the flexibility to update their participation status with the Treasury, allowing them to adjust the types of loan covered under the scheme or even withdraw from the scheme entirely. Any changes in participation must be communicated in advance and will take effect at the end of the relevant calendar month or as specified within a three-month window. Each eligible loan granted during the specified period must be reported to the Treasury to remain under the guarantee. This systematic reporting ensures transparency and proper administration of the scheme, helping to maintain its integrity and effectiveness in supporting borrowers with limited deposits. Lenders must also offer a five-year fixed rate option as part of their product range. By meeting these conditions, the scheme aims to provide more opportunities for prospective homeowners to enter the market with a smaller deposit, thus supporting the housing market's stability and growth.

2. Private Schemes

- Private Guarantor Mortgage Schemes: Various lenders offer private guarantor mortgage schemes. These schemes often involve a family member acting as a guarantor, providing additional security. This can be particularly beneficial for borrowers with lower incomes or smaller deposits, as it may increase their chances of securing a mortgage.

Lenders Offering Guarantor Mortgages: 

1. Barclays

Family Springboard Mortgage

Barclays offers the Family Springboard Mortgage, designed to help buyers with smaller deposits. This mortgage allows a family member or friend to place 10% of the property's purchase price into a savings account linked to the mortgage. This money acts as security for the mortgage and earns interest. The buyer can obtain a 100% mortgage, meaning they don't need a deposit, while the family member gets their money back with interest after three years if the mortgage payments are up to date. This product is suitable for first-time buyers and those looking to purchase a new home with the support of a guarantor.

2. Aldermore

Flexible Guarantor Mortgages

Aldermore is known for offering flexible mortgage solutions, including guarantor mortgages that cater to a wide range of borrower needs. Aldermore's products are ideal for individuals with complex financial situations, such as self-employed borrowers or those with irregular income. Their guarantor mortgages allow a family member to use their savings or property equity as security, helping the primary borrower secure a mortgage with a smaller deposit. Aldermore’s flexibility makes it a good option for those who may not fit the traditional borrower profile.

3. Kent Reliance

Guarantor Mortgage Options

Kent Reliance offers guarantor mortgages with flexible criteria, making them accessible to a broad spectrum of borrowers, including those with less conventional financial backgrounds. Borrowers can use a family member's savings or property as security. This allows individuals with smaller deposits to secure a mortgage. Kent Reliance’s approach is particularly beneficial for first-time buyers and those looking to enter the property market with the assistance of a guarantor.

4. Skipton Building Society

Joint Borrower Sole Proprietor Mortgage

Skipton Building Society provides the Joint Borrower Sole Proprietor (JBSP) mortgage, which operates similarly to a guarantor mortgage. This product allows an additional family member to join the mortgage application to support the primary borrower’s application without being on the property deeds. This is particularly useful for first-time buyers who may not have sufficient income to qualify for a mortgage on their own. The JBSP mortgage enables borrowers to benefit from the combined income while retaining sole ownership of the property.

5. Loughborough Building Society

Buy for Uni Mortgage

Loughborough Building Society offers the Buy for Uni mortgage, designed specifically for students who wish to purchase a property while attending university. This mortgage allows students to buy a property with the support of a guarantor, typically a family member, who provides security for the loan. The guarantor can use either their savings or property equity to back the mortgage. This option helps students secure accommodation and potentially benefit from property value appreciation over their study period.

6. Cumberland Building Society

Various Guarantor Mortgage Options

Cumberland Building Society provides a range of guarantor mortgage options, catering to first-time buyers and those with smaller deposits. Their products are designed to help individuals get on the property ladder with the financial backing of a guarantor. Whether the guarantor uses their savings or property equity as security, Cumberland’s flexible approach makes it easier for borrowers to secure a mortgage. This support structure is ideal for those looking to overcome the hurdle of a large deposit requirement.

According to the English Housing Survey, about 36% of first-time buyers reported receiving help from family or friends in 2022-2023, up from 27% in the previous year. These statistics are reflecting the financial challenges and extended support required to purchase a home. [2].

Weighing the Pros and Cons

While guarantor schemes undoubtedly present an attractive opportunity for first-time buyers and those with limited savings, it is crucial to consider both the advantages and potential drawbacks carefully:

Pros:

• Lower deposit requirement, making homeownership more accessible

• Opportunity to build equity and establish a foothold in the property market

• Potential for long-term financial gains as property values appreciate

Cons:

• Significant financial risk for the guarantor, who becomes liable if the borrower defaults on payments

• Potential strain on personal relationships if financial obligations are not met

• Potential impact on the guarantor's credit score and ability to secure future financing

Alternatives for Low-Deposit Buyers

For those unable to find a suitable guarantor or who prefer to explore alternative routes, several other options exist for prospective buyers with limited deposits:

1. Saving for a Larger Deposit: While it may take longer, the conventional approach of saving for a more substantial deposit can reduce the need for a guarantor and potentially secure more favourable mortgage terms.

2. Shared Ownership Schemes: These schemes allow buyers to purchase a share of a property, typically between 25% and 75%, and pay rent on the remaining portion. This approach requires a smaller upfront deposit, related to the purchased share, making it an attractive option for those with limited savings.

3. The government has implemented various programs to support first-time buyers and those struggling to save for a deposit. Examples include Help to Buy ISAs, Lifetime ISAs and the First Homes Scheme, which offer financial incentives, tax advantages and discounted properties for eligible buyers.

4. The government's Mortgage Guarantee Scheme has played a pivotal role, backing mortgages for properties worth up to £600,000, helping many first-time buyers and existing homeowners move up the property ladder despite the economic challenges posed by the pandemic​​.

With a government guarantee supporting 95% of mortgages, this initiative has bolstered consumer choice and lender competition, leading to more favourable conditions for buyers and stimulating the housing market. Additionally, extending the stamp duty relief and introducing the First Homes Scheme have further diversified the options for first-time buyers and key workers, making homeownership more attainable​​.

Through various government initiatives, including Help to Buy ISAs and Lifetime ISAs, over 687,000 households have been supported in pursuing property ownership, evidencing the government's commitment to helping citizens achieve this milestone​.

As we look towards the future, understanding these schemes and leveraging them effectively can unlock the door to homeownership for numerous individuals, reinforcing the transition from 'Generation Rent' to 'Generation Buy.'

FAQS:

Q. What are mortgage guarantor schemes?

A. Mortgage guarantor schemes allow a third party, usually a family member or close friend, to take on the financial risk of a mortgage if the primary borrower fails to make payments. The guarantor acts as additional security for the loan, often enabling the borrower to obtain a mortgage with a smaller deposit or to borrow at a more favourable rate.

Q. What are the benefits of using a guarantor scheme for a mortgage?

A. The main benefit is improved mortgage accessibility, especially for first-time buyers struggling to save a substantial deposit. Guarantor schemes can also help borrowers access higher loan amounts and potentially secure better interest rates due to the reduced risk to lenders.

Q. Are there any drawbacks to guarantor mortgages?

A. The most significant drawback is the financial risk placed on the guarantor. If the borrower defaults, the guarantor is responsible for covering the mortgage payments, which could put their finances or property at risk. It is also possible for the relationship between borrower and guarantor to be strained if financial issues arise.

Q. What are the eligibility requirements for guarantor schemes?

A. Eligibility criteria can vary depending on the specific scheme or lender. Typically, guarantors need an excellent credit score, sufficient income to cover the mortgage if necessary and often some form of collateral, such as savings or property. Borrowers must still meet specific lending criteria, such as creditworthiness and affordability checks.

Q. Are there government-backed guarantor schemes?

A. The government has introduced schemes such as the Mortgage Guarantee Scheme to help stimulate the housing market by encouraging lenders to offer 95% loan-to-value mortgages. This scheme enables borrowers to purchase a home with as little as a 5% deposit.