Mortgage and guarantor

Alan_In_London

Hi,
My income situation is currently a bit rocky. I'm self employed but have only been so for a short amount of time, and business is not great.

I do however have quite a lot of savings, enough for a substantial deposit on a property and then enough to cover mortgage payments for a good few years.

Now, even though I can show enough money to cover my expenses and the mortgage for a good few years, my current work situation is going to make it difficult to get a mortgage (especially if my contracts dry up, which they are in danger of doing so).

The only potential saving grace is that I have a very close acquaintance who could possibly be a guarantor. I have not approached him yet, but I think there is maybe a 50/50 chance that he would be happy to be a guarantor for me.

He is, a very wealthy individual, and I think that no lender would doubt his creditworthiness.

I have never mentioned this to any lenders or mortgage brokers, because I always hoped to do this on my own.

However, I would if anybody could advise me whether, in theory, a lender would likely be happy to put aside all my income issues, in light of the fact that I do have a big deposit, and the payment cover for an extended time, plus a guarantor (whose creditworthiness really is beyond question).

Any help would be really appreciated.

Thrugelmir

Entering the property market at a time you are aware that your income is drying up seems unadvisable.

You ideally need 3 years accounts from self employment to obtain a mortgage. So you should establish yourself first.

Thrugelmir

If you could give some details of the deposit and mortgage you require. It would give some clarity to the financial side.

Alan_In_London

Thrugelmir wrote: »

If you could give some details of the deposit and mortgage you require. It would give some clarity to the financial side.

Sure...

I have £375,000 and I want to buy a house in the region of £500,000. I want to keep a good chunk of cash as a buffer, so I was considering getting a 25-30% LTV giving a mortgage of about £150,000, £25,000 in stamp duty and other expenses, and £200,000 in cash.

My current expenses are about £20,000 in rent and £20,000 for everything else.

With an interest only mortgage I reckon that I will pay about £10,000-12,000 a year, hence the saving of almost £10,000 per year. Of course, these expenses are all ballpark figures.

I know that some might say I should buy a much cheaper house and have no mortgage, but that doesn't fit with my family's needs, and it also gives me less of a buffer for the non-mortgage expenses.

So, I think I am in a fairly strong financial position, again probably much better than somebody who has a £150,000 deposit and a permanent job, but less savings - but I do fall foul of lending criteria for almost all lenders, due to the lack of income track record for the self employed.

Which is, of course, why I wonder whether a guarantor could possible assist.

Alan_In_London

Hi again.

It would be great if somebody could help me with this but, having thought about it, I have realised that there is something pretty fundamental that I don't understand about guarantors.

I am now wondering what happens if the buyer ends up defaulting on the mortgage. Presumably, the guarantor then becomes liable, but does that mean that the guarantor can pay off the mortgage and then own the property, or he is only ever liable to cover the mortgage but without any chance to actually own it?

I obviously would hope that I would never default, and can't imagine myself getting into a situation where I eat so far into my buffer that I could default, but obviously any guarantor would have to consider the worst case scenario. If it is that he pays and he gets the house, I don't think it would be a problem, if it is that he pays and I or the bank get the house, that would obviously be different.

Any help on this, or the original question would be greatly appreciated.

Thrugelmir

Alan_In_London wrote: »

I am now wondering what happens if the buyer ends up defaulting on the mortgage. Presumably, the guarantor then becomes liable, but does that mean that the guarantor can pay off the mortgage and then own the property, or he is only ever liable to cover the mortgage but without any chance to actually own it?

A Guarantor guarantees the mortgage repayments and in the event of total default, the entire mortgage balance. They only secure the debt and have no right as to the ownership of the property.

At the outset they will need to prove that can meet the repayments out of their income. As they are legally bound for the duration of the mortgage term. Until such time as you can demonstrate an ability to afford the debt.

Bullfighter

Why not buy a nice place for £300k cash and keep the £75k aside for capital?

Sounds a lot less complex than trying to over-leverage yourself and drag an acquaintance into being a guarantor.

Alan_In_London

Bullfighter wrote: »

Why not buy a nice place for £300k cash and keep the £75k aside for capital?

Sounds a lot less complex than trying to over-leverage yourself and drag an acquaintance into being a guarantor.

Yes, it certainly would be less complex, but there are two things.

Firstly, just a modest 3 bedroom semi or terraced house in the area I live would cost much more than that. To fall into that price range, I would have to move quite far away from transport links and schools, and into far less pleasant (in terms of crime rate, anti-social behaviour etc) areas, several miles away. Either that or completely uproot to somewhere completely different, where I might not get work and the kids would have to go to new schools etc

Also, I would imagine that my non-housing outgoings would still be in the range of £20,000, so I would be down to about 3.5 years of buffer (which could be significantly eroded by any major one off expenses).

Overall, if I can buy a house for £500K, without any of the downsides of moving area that I mentioned, and be able to comfortably finance the mortgage, I think we would be much better off.

After all, the leverage of house price over my total savings is only 30% (put another way, my net borrowing is just 25% of the house price), it is just that I want to keep cash available.

sophievenusdoom

Alan_In_London wrote: »

Yes, it certainly would be less complex, but there are two things.

Firstly, just a modest 3 bedroom semi or terraced house in the area I live would cost much more than that. To fall into that price range, I would have to move quite far away from transport links and schools, and into far less pleasant (in terms of crime rate, anti-social behaviour etc) areas, several miles away. Either that or completely uproot to somewhere completely different, where I might not get work and the kids would have to go to new schools etc

Also, I would imagine that my non-housing outgoings would still be in the range of £20,000, so I would be down to about 3.5 years of buffer (which could be significantly eroded by any major one off expenses).

Overall, if I can buy a house for £500K, without any of the downsides of moving area that I mentioned, and be able to comfortably finance the mortgage, I think we would be much better off.

After all, the leverage of house price over my total savings is only 30% (put another way, my net borrowing is just 25% of the house price), it is just that I want to keep cash available.

Where do you live?! Lol, I thought Exeter was expensive to buy in, but you could still get a very nice house for £300k!!

Anyway, I have to agree with the previous posters. Is it worth having to rely on your friend to make your mortgage payments should the unthinkable happen? I understand that you have buffered yourself with a sum of money so that this should not happen, but you have to think of all possibilities. What if something happened whereby you were not able to work for a year or so? Would your sum cover the mortgage repayments on a £500k house AS WELL AS your other monthly outgoings? I know how you feel not wanting to move out of the area you live in, and uprooting everyone else in the process (I was in a similar situation when we bought our house!) but sometimes it works OK, and things aren't as bad as you expect them to be.

Good luck

sophievenusdoom

Green_Jelly wrote: »

Hi. I live somewhere in North London (don't want to say exactly where).

All a matter of opinion of course, but yes, I do think that it is worth it to not have to live in a dodgy area, or add a lot of time to my commute and uproot the family.

I can't help but think that it is fairly common for people to take on mortgage with a 75% LTV and few savings, just because they have a job.

Well, very few jobs are secure these days, and most people are just two weeks and statutory redundancy away from losing their job.

The calculations I have given above do, aside from one off events, cover me for about 7 years for mortgage payments AND other expenses (by my calculations we spend £20,000 on top of our rent).

On that basis I feel that I am at significantly less risk of default, than somebody who is relying on the potential money from an ongoing job, rather than the actual money I have in the bank.

After years of working hard and saving, I don't think I am taking any significant risks, and just don't see why I would choose to make the family compromise so much, when I have almost 80% of the purchase price in cash.

Still, I do welcome all input you guys might have! Thanks again

Oh no, wasn't asking for specifics lol, but yes, I think London is the one place that is more expensive than the South West!!

Again, as I explained, I do understand as we wound up having to move to the less expensive side of the city in order to be able to afford to buy somewhere - but we had no choice; it was all we could afford. But now that we are here, I really like it (even though it takes twice as long to get to work!). I'm just saying that if the lender insists that you cannot borrow as much as you would like, you might not have a choice.

I am not a professional, and don't know what the bank will say, but I don't think they will take savings into account when assessing a mortgage application. My understanding is that they take into account your joint earnings and that is that. But I could be wrong.

I really hope you figure something out, and can buy your dream house. Keep us posted on how you get on

Thrugelmir

Green_Jelly wrote: »

On that basis I feel that I am at significantly less risk of default, than somebody who is relying on the potential money from an ongoing job, rather than the actual money I have in the bank.

Except that you are looking for interest only mortgage. So will need to provide evidence to the lender of how you intend to repay the capital balance. A combination of rising interest rates and falling house prices will soon erode your capital.

A lender would prefer a borrower who opted to take a repayment mortgage from the outset.