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Mortgage types in detail
A ‘no deposit’ mortgage, otherwise known as a ‘100% mortgage’, means the borrower doesn’t have to put a deposit down on the house they’re buying. Instead, the whole cost of the house is covered by the mortgage.
If that sounds too good to be true, you’re (mostly) right. This type of mortgage is very rare, and the only way you can now get a mortgage without putting a deposit down is by finding a guarantor – the person who promises to pay up if you can’t.
With a guarantor mortgage, someone else, usually a family member, agrees to be named on your mortgage. (If you’ve ever rented a student property, you’ve probably had to find a guarantor to sign the contract – it’s the same principle here.) If you don’t make your repayments your guarantor will have to cover it instead. If they don’t make those repayments, their own property and savings are at risk.
It’s a big responsibility, and not everyone will be comfortable putting their own money on the line for someone else’s mortgage. On the other hand, it’s a good way to help someone get on the property ladder when lenders might otherwise be put off because by the buyer’s financial circumstances.
To make matters more complicated not all guarantor mortgages are 100% mortgages, as some lenders will want a deposit anyway.
Can my parents/grandparents/friend be my guarantor?
Maybe – it’s up to the lender! Some lenders only accept family members as guarantors, whereas others will consider friends too. In either case, your guarantor will probably need to:
- Have a high enough income to potentially cover your mortgage as well as their own outgoings
- Have a good credit record
- Own their home, or have already paid of a certain percentage of their mortgage.
What are the risks of a guarantor mortgage?
Guarantor mortgages come with an inherent risk for the guarantor. If you fall behind on your repayments you’re not the only one in hot water – someone else is involved too! As well as the financial cost, it could potentially cause friction between you and your loved ones too.
Your mortgage broker will be able to explain the ins and outs of guarantor mortgages to both you and the person helping you. Because your mortgage is dependent on your guarantor, there will be small print in place to cover the following:
- What happens if your guarantor passes away
- What happens if your guarantor’s financial circumstances change
- What happens if you want to change guarantor, or remove your guarantor
- What to do if you miss a repayment.
Because guarantor mortgages have specific rules, and because your guarantor needs to understand what they’re getting themselves into, most lenders will only give you this type of mortgage if you’ve both talked to a legal specialist or a mortgage broker.
Guarantor mortgages can be a great way to get on the property ladder if you have someone who’s happy to be named on your mortgage.
If not, there are other options. With a Shared Ownership home you could take out a far smaller mortgage and put down a smaller deposit than is usually needed. Not bad!
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