First-time buyers: could a guarantor mortgage help you to the property ladder?

It’s a hard time for first-time buyers, with low deposit mortgage options drying up and also the stamp duty holiday offering tax cuts to competing home movers and buy-to-let investors.

First-time buyers have long trusted the ‘bank of mum and dad’, with lots of parents gifting deposits to assist their kids buy homes.

But COVID-19 has provided mortgage brokers the jitters, meaning they’re now requesting bigger deposits – thereby increasing the burden on parents who wish to help out.

Here, Which? explains how guarantor mortgages happens to be an alternative choice to the bank of mum and pa for first-time buyers and their parents.

Low deposit deals still suffer

Since the outbreak of COVID-19, the amount of 90% and 95% mortgages for first-time buyers has plummeted, with simply a handful of small-deposit deals available these days.

Despite the property market reopening, banks happen to be slow to reinstate low-deposit mortgages, meaning many buyers will require a deposit with a minimum of 15% to get a loan.

There are some alternatives, however. Guarantor mortgages allow parents to use their savings, property or earnings to help the youngster purchase a home.

Guarantor deals haven’t been immune to the cull, but a handful of providers are continuing to accept applications.

Using your savings as security

These guarantor deals allow parents to deposit 5% or 10% of a property’s value into a special checking account using their child’s mortgage company, taking the place of a standard mortgage deposit.

This acts as collateral in case the child defaults on their own mortgage.

Savings are usually secured for three or 5 years. Some lenders pay interest on savings, but others don’t.

When we evaluated the market in late 2021, nine lenders offered these kinds of mortgages. Today, that figure has dropped to four.

• Who offers them? Barclays, Family Building Society, Mansfield, Tipton
• COVID-19 withdrawals Lloyds, Loughborough, Marsden, Saffron and Halifax have suspended their deals.
• Summary Allows parents to help keep charge of their funds instead of gift it to their child, but interest rates might not be attractive.

Using your property as security

These deals allow parents to make use of their property as security against the child’s mortgage.

The bank will often secure a charge of between 10% and 25% of the new property’s value from the parent’s home.

Once the child has repaid a big enough proportion of the mortgage, the charge will be released.

10 lenders offered these deals at the end of 2021, however only five providers are considering applications.

• Who provides them with? Buckinghamshire, Family Building Society, Mansfield, Nationwide, Tipton
• COVID-19 withdrawals Bath, Loughborough, Marsden and also the Post Office have suspended their deals. Aldermore withdrew its deal in November 2021.
• Summary Doesn’t require the parent to put up their savings, however their house will be at risk if the youngster defaults.

Joint mortgages

Joint mortgages allow a parent or gaurdian and child to join together to buy a house.

This means parents can use their income and savings to enhance the child’s mortgage changes.

There are two big pitfalls, however.

First, parents is going to be jointly responsible for the mortgage. Second, if they already own their very own home they will need to pay a stamp duty surcharge, which could run to a lot of money.

• Who offers them? Lenders tend not to offer specific ‘joint’ mortgages. Instead, many will consider joint applications on their normal mortgage range.
• Summary Could offer the child a home loan boost, but the stamp duty costs make this option a smaller amount attractive.

JBSP mortgages

Like joint mortgages, Joint Borrower Sole Proprietor (JBSP) deals allow children and parents to club together to get a mortgage.

The huge difference is that only the child’s name is going to be on the property’s deeds, meaning the parent can steer clear of the stamp duty surcharge.

JBSP mortgages are relatively niche. Older parents may struggle to get accepted and lenders may prefer applications where the child can be their earnings will rise significantly in the future.

Unlike some products that use the parents’ saving or property as collateral, joint and JBSP mortgages will still require the buyer to place up a deposit, which differs from deal to deal.

• Who offers them? Some lenders consider JBSP applications on their own standard ranges. Those offering specific products include Newcastle, Furness, and Hinckley and Rugby.
• Summary A viable way of boosting mortgage chances without incurring the stamp duty surcharge, but the limited choice may mean higher rates.

‘A JBSP deal solved the problem buy my first home’

Kyna Marshall, 24, from Lincolnshire, bought her first home using Newcastle Building Society’s Joint Mortgage Sole Proprietor deal.

She told Which?: ‘I was originally looking to buy a house on my own, but my large financial company suggested that the joint mortgage could improve my likelihood of getting accepted.’

Kyna took out the mortgage together with her mother. As her mother was 49 during the time of the application, Kyna was able to take out a 30-year mortgage term.

She says: ‘The procedure was quite straightforward and it enabled me to get a better house than I'd happen to be in a position to afford on my own.’

Newcastle relaunched its JBSP deal a week ago, having withdrawn it in the wake from the COVID-19 outbreak.

Should I take out a guarantor mortgage?

Guarantor mortgages can be attractive, especially at a time when there are few low deposit mortgages available.

That said, there's a handful of key considerations.

First of all, a guarantor mortgage results in a financial outcomes of parent and child, with the parent potentially putting their savings or property at risk if their child defaults. Money can be an emotive issue, so consider whether this is a wise move.

Second, minute rates are apt to be more expensive than deals around the open market. So while a guarantor deal may help your child purchase a home, it’s vital that you take into account the ongoing costs of borrowing and make sure the mortgage is affordable.

If you're considering a guarantor deal, it’s worth taking advice from a whole-of-market mortgage broker, who are able to assess your financial circumstances and explain which products might be most suitable.

Tips for moms and dads helping first-time buyers

Guarantor mortgages are only one of the ways that parents can help their child to the property ladder.

Our guide on how to help your son or daughter buy a home includes 10 key things parents should think about before handing over money or registering for a guarantor mortgage.

First-time buyers may also find inspiration in our guides regarding how to save for a mortgage deposit and boosting your mortgage chances.