First-time buyers often can't get a big enough mortgage to buy a house, but if parents are willing to help, there's a way around the problem.
As first-time buyers continue to struggle to get on to the property ladder, lenders are becoming more adventurous in the lending stakes. Which is why there has been an increase in the number of companies offering 'guarantor' mortgages.
The Co-op Bank is the latest to launch a new version of the product which enables first-time buyers to bypass the problem of not being able to borrow enough by themselves to buy a home.
Guarantors are usually parents or other relatives who pledge to cover either the mortgage as a whole or any shortfall over and above what the buyer can afford to borrow. The guarantee lasts until the borrower is earning enough to cover the whole loan at which point the guarantor is released.
The mortgage company will need to assess the guarantor's own income and current financial commitments to ensure they can cover the relevant amount of the loan should the buyer fall into arrears. But covering the shortfall is usually much more feasible for the guarantor than guaranteeing the whole mortgage.
Let's say, for example, that you earn £20,000 which would enable you to borrow, say, 4 times your income (£80,000) but the property you want to buy costs £120,000. The parent or relative would only need to guarantee the payments required to service the shortfall of £40,000. And where there's a guarantor available, mortgage companies will often agree to a 100% mortgage, which means the purchaser does not have to find a deposit.
Although the Co-op's latest offering requires the guarantor to be in a position to service the whole mortgage, there is an extra bonus of 1% cash back and a free basic valuation which helps to cut costs. The rate is fixed at a relatively hefty 6.29% but it is fixed for five years which at least allows for certainty of the monthly payment required.
So, if your parents cannot help you with a lump sum nor guarantee the whole mortgage, they may be prepared to guarantee a portion of it. The important thing though, is that you can afford all of the repayments yourself and that you don't default, otherwise it won't be just the bank that comes after you!
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