Guarantor Mortgage Scotland

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Guarantor Mortgage Scotland

Carolyn talks to us about guarantor mortgages in Scotland.

Is it hard to get a guarantor mortgage in Scotland? How does it work?

I get asked this very often, but guarantor mortgages almost don’t exist anymore. They’re not as popular as they once were. There was a time where a parent or family member would offer some form of guarantee to the mortgage lender, usually to help a First Time Buyer secure a mortgage.

The idea was that somebody who perhaps had more income, experience and credit history would underwrite the mortgage. So if the person taking on the mortgage failed to pay, it would land on that guarantor to make the payment. It was an extra layer of security for the lender, and allowed them to lend more money or accept somebody who had no previous history or a low income.

We don’t see it working like that anymore.What we tend to have now is something called Joint Borrower Sole Proprietor mortgages. Again it involves a parent or somebody who is equally responsible for the mortgage, but they don’t actually own the property.

What are the requirements for a guarantor mortgage in Scotland?

It may be helpful for me to explain the requirements for a Joint Borrower Sole Proprietor mortgage. Here, the assessment by the lender will be based on the overall affordability for both people – for example a parent and child. They’ll consider both people’s income and creditworthiness. If the parent owns their own property with a mortgage on it, lenders add that cost into the affordability.

So if you’ve got a parent who’s got a massive mortgage and a lot of outgoings, that will probably reduce the affordability. But if they are mortgage free, have fewer commitments or a larger salary, that would be absolutely fine.

How much can I borrow and what deposit do I need?

How much you could borrow is completely dependent on that affordability calculation. Bear in mind that the guarantor probably has their own property, and even if there’s no mortgage on that, there will be running costs. They will be also responsible for the running costs of the property via the Joint Borrower Sole Proprietor mortgage.

Even if it’s agreed that the adult child is going to pay all the bills, the parent is still ‘jointly and severally’ liable. The lender perceives both parties to be fully responsible for everything.

It also comes down to income and age. Part of the affordability calculation is based on the term you could take. Most Joint Borrower Sole Proprietor mortgages will allow the term of the mortgage to perhaps age 80, which may be older than a traditional residential mortgage.

But with a parent involved, that will of course be a shorter term than a First Time Buyer in their 20s could usually take. A shorter term means higher monthly payments.

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Who can and cannot be a guarantor in Scotland?

It’s usually down to the relationship. For example, a parent and child is absolutely fine, but it could be other family members – it’s down to the lender to make that assessment. Some lenders have been relaxing that and allowing aunts and uncles to be guarantors, for example.

So if your plan involves something other than a straightforward parent and child relationship, it’s worth discussing that with a mortgage advisor to make sure that particular relationship is allowed.

The person doesn’t need to be in a particular occupation, or have a particular standing in the community, or anything like that.

Do I need a guarantor if I have good credit?

Actually, you need good credit regardless. If there’s been some form of adverse credit, speak to your mortgage advisor. It might not be prohibitive, but the whole Joint Borrower Sole Proprietor offer is around helping people who have perhaps little or no income or a small deposit. It’s about utilising the higher earnings of a parent to help them and get on the property ladder.

We can’t use a guarantor to back up somebody who’s had bad credit and ensure they pay. It doesn’t really work like that now.

Do guarantors get credit checked?

Yes, they do. Their creditworthiness is treated equal to that of the actual buyer. They will be fully credit checked.

Can you get a guarantor mortgage with bad credit?

It depends. Only a few lenders offer this Joint Borrower Sole Proprietor arrangement and
they do tend to be slightly more conservative, so they may be less tolerant of any credit misdemeanours.

But before ruling it out as an option, have a conversation with us. See if what you’re perceiving as bad credit is really going to cause you a problem, because not everything will mean the lender will say no.

Also, the more deposit funds you have available, the more relaxed the credit criteria is with mortgage lenders.

How legally binding is a guarantor in Scotland?

With the Joint Borrower Sole Proprietor mortgage, the actual property title is owned by the child in the parent-child scenario. But the mortgage is fully joint. The guarantor or the joint borrower has all of the liability and none of the asset.

They don’t own the property or have jurisdiction over it, but they’re fully responsible for the mortgage. They might contribute to the mortgage or the child might pay the mortgage in full. But if there’s any problem with getting that payment, the mortgage provider could come after the guarantor for payment.

If payment doesn’t come forward, then the full implications of not paying a mortgage will come to either party. And usually they’ll go after the easiest person to pursue – which is often the guarantor.

What power does a guarantor have in Scotland?

You don’t have very much power other than to ensure that the mortgage is paid. As a joint borrower on the mortgage, you have every right to access information, speak to the lender directly and be notified if there are any missed payments. But that’s it. You don’t have the authority to insist on the sale of the property, for example.

Are guarantor mortgages more expensive in Scotland?

Generally, no. But only a few lenders offer those types of arrangement at the moment. Usually, they’ll allow you to pick from their standard product range for the mortgage.

Being restricted in the number of lenders means that there might be cheaper offers out there for the borrowing you’re looking for, but you wouldn’t be able to access them. We need a specific lender.

It changes all the time, but they do tend to be small differences. It’s not specifically more expensive to get a Joint Borrower Sole Proprietor mortgage. On some days they might very well be the cheapest on the market.

How long is a guarantor liable?

Theoretically, they’re liable for the whole term of the mortgage.

What we often find is that this is used where a child is at university, with the aim that they will take on the mortgage themselves once they graduate and have a job. Or they might agree to sell the property once they graduate.

Those are informal arrangements and not necessarily legally enforceable, but you tend to find that that’s the agreement. But when you take on a 20 year mortgage, for example, you need to be aware that you are liable for 20 years, unless you sell or remortgage into the child’s name.

Are guarantor mortgages a good idea?

I think they’re a great idea. The problem is that people don’t know enough about them.

One of the reasons why we’ve changed to the Joint Borrower Sole Proprietor format is because of the ‘additional dwelling supplement’ tax.

If you own the family home and wanted to buy a property for your child to live in while they’re at university, which was very popular for a while, then traditionally you would be liable for an extra 6% additional dwelling supplement on the full purchase price of that property, which is quite significant.

With Joint Borrower Sole Proprietor, you could leverage the parent’s income and credit worthiness, but because they don’t own the property, they’re not subject to that additional dwelling supplement.

You might still have to pay land and buildings transaction tax on the purchase price, but you will avoid that very expensive supplement. So if your circumstances suit, it works really well.

Do you have any recent examples to share?

I recently helped clients in that parent and student child scenario. The mortgage ended up being much the same price as for student accommodation, which could be quite expensive.

So because they were in a position to do it, it meant they had the asset of a property and could choose what they wanted to do with it. They’re hoping that after the four years of university, they could sell it for a profit. Their view is that paying for student accommodation is just lost money.

It’s not for everybody and not everybody’s circumstances will fit. But they’re great options.

How can a mortgage broker help with a guarantor mortgage?

Obviously mortgage advisors are very helpful generally. But here, we’re often dealing with a parent who’s quite experienced with financial transactions, who’s maybe held several mortgages in their lifetime, and they’re quite comfortable.

But then you have a child where it’s often their first time – they’re very inexperienced. It’s down to the skill of the advisor to make sure that both parties are given the information they need. They’re both taking on a significant credit commitment and a legal responsibility.

So it’s important that we speak to everybody that’s involved in that mortgage. Often we’ll speak to them separately, to make sure they understand everything that they need to know about taking on this level of debt, commitment and responsibility.