Guarantor v joint mortgage

An important consideration for family mortgages

There are generally two ways in which a first time buyer and family member combine forces to purchase a property.

• Joint mortgage: both the parent(s) and their son/daughter are named on the mortgage deed. The mortgage lender bases their decision as to how much they will lend on the combined income of all the applicants, including both the first time buyer and their parent/family member.
• Guarantor: only the first time buyer is named on the mortgage deed; the family member(s) assisting them are not named on the mortgage deed but instead provide a guarantee that they will be responsible for all the mortgage repayments in the event of their son or daughter being unable to do so. While most mortgage lenders will require guarantors to be able to support the whole mortgage loan, there are lenders on our panel who will allow the guarantor to be liable only for the excess amount.

In deciding which method to choose, there may be factors that mean you have to consider one option. For example, if the parent's income is not enough to support the whole mortgage, this would probably rule out the guarantor option with most mortgage lenders. However, while we are always able to provide general information to answer your queries, it is ultimately up to you to decide which option is best and you should consider taking legal advice when considering acting as a guarantor (in fact, most lenders will require you to do so). The following are factors to consider:

Advantages for guarantor

• Does not have an equity interest in the property and does not appear on the land registry.
• Only an advantage if wanting an 'arms length' transaction and merely using their income to 'leverage' the income of the other party.
• Cannot be liable for any Capital Gains Tax on disposal.
• Not an asset of the guarantor for the purposes of inheritance tax.

Disadvantages

• The guarantor does not receive statements or communications from the lender - therefore if the situation deteriorates, e.g. their son or daughter stops paying the mortgage - he/she will not know until their guarantee is called in.
• They still have to declare the amount they are guaranteeing (usually the whole mortgage) if they apply for a personal mortgage on their own behalf and it will be treated as if the loan were actually their own i.e. it will be deducted from the amount they can borrow based on their income.
• They do not have an equity interest in the property unless specified elsewhere.
• They will usually have to get a signed statement from their legal adviser saying they fully understand the commitment they are taking on - which they will have to pay for.
• While there are exceptions to this rule, as most lenders require guarantors to be able to support the whole mortgage this means that the guarantor's salary may have to be substantial, particularly if they have another existing mortgage to deduct. For this reason, many parents have no realistic choice but to assist through a joint mortgage which is based on their combined incomes.

Buying a share in the family home

We receive frequent queries from people looking to buy or sell part of a family home. There are various ways of approaching this topic but most cases tend to be quite technical – more so than some customers anticipate. Thus, if you are a parent looking to sell part of your home to one of your children, or a son/daughter looking to buy a share in a property owned by another family member, please go to our contacts page and send us a message with the subject line 'Share in family home'. There is a short form which gives you a chance to summarise what you are looking to achieve and we will then call you at a specified time to talk it over, or reply by email if you prefer.

A note on parental deposits

While many parents and their children are combining forces to buy a home, in our experience the most common way this happens is not through a joint or guarantor mortgage but by way of a parental gift to provide the son or daughter with a deposit.

Generally, lenders will not mind if the deposit is provided by parents as long as it is not on the basis of a loan, which is repayable with interest and has a specific date on which the loan must be repaid. If the lender considers the deposit as a loan this may affect their decision to advance the mortgage. Thus, when applying for a mortgage with a parental deposit, the parent may be asked to provide a letter confirming that the deposit is being given as a gift, that no interest will be payable on this sum and neither will they expect to have any pecuniary interest in the property.