The Self-Employed Guide to Guarantor Mortgages

As a self-employed business owner, you know how difficult it is to get a mortgage. Proving your affordability to in-branch bank advisors is a constant headache, even though it’s as plain as day to you.

You make good money, but your accounts show a lower “net profit” to save on tax. Or perhaps you’ve reinvested all your spare cash into the business to ensure its future prosperity. A sound move in any other situation.

But the net effect is that it could leave you with little spare to put towards a mortgage deposit. We hear it more often than you’d think.

So, what can you do when the bank says “no” because your paperwork doesn’t fit their tick-boxes? A Guarantor Mortgage might be a lifeline you’ve not considered.

We get it. As an independent professional, you value that independence. But let’s reel in that ‘go it alone’ mentality for just a second. Here’s how a guarantor mortgage might work for you, without the banking jargon.

1. What is a Guarantor Mortgage?

Think of a guarantor as your third-party financial safety net. Said third party (usually a parent or close family member) promises to pay your mortgage if you can’t.

But that doesn’t mean they hold sway over ownership; instead, it means:

• You own the home; it’s your name on the deeds
• They take on the risk if you can’t meet repayments
• They do not own a share of the property

For a self-employed person, a guarantor bridges the “trust gap.” The lender might be nervous about your fluctuating income (if you’re not a fixed-rate contractor). But your guarantor’s stable assets reassure them by offsetting any risk elements in their lending criteria.

2. Why would a business owner need one?

Showing only minimal profits isn’t the only time you’d need to consider a guarantor. Your income might just be of a “complex” nature, as most self-employed people’s is.

Guarantor mortgages are a great solution if:

• You have a “thin” trading history: you have only been self-employed for 1 year, but lenders typically require 2-3 years
• You lack a big enough deposit: you have assets, but they’re tied up in business stock or equipment.
• Your “on-paper” income is low: you (quite legally) minimise your income, e.g. salary and dividends if you own a limited company, to be tax-efficient. At high street level, most lenders’ algorithms cannot incorporate profits held within your business, so your net income doesn’t allow you to borrow what you need.

3. The “No Deposit” Option (100% Mortgages)

If your guarantor is willing to secure the mortgage against their own home, some specialist lenders will offer you a 100% Mortgage. This means you don’t have to find a penny of your own money for the deposit. This is a huge selling point if you’ve invested in your business and left yourself cash poor.

How it works:

You borrow the full cost of the home: 100% LTV. The lender then places a “charge” on your guarantor’s property. If you stop paying, the lender can then pursue your guarantor’s assets to recover any money owed to them.

4. Who can be my guarantor?

Unless he’s a millionaire, you can’t just ask a mate down the pub to be your guarantor. Because lenders attribute a healthy dose of risk to guarantor mortgages, your guarantor needs to be rock-solid.

Here’s a checklist you can use to vet whoever is going to help you buy your home:

• Relationship: usually a parent, guardian, step-parent, or grandparent
• Assets: they must own their own home, ideally with a considerable amount of equity in it
• Credit: they must have a spotless credit history (as do you*)
• Income: their income must cover their lifestyle, plus your mortgage repayments if things go wrong

5. The Risks (Read this carefully)

Asking a close relation to be a guarantor is a massive request. The trust you have in each other must be unbreakable (as much as familial ties can be). You’re asking them to put their home on the line to support your homeownership dreams and business’s stability.

• For You: having a worthy guarantor won’t give you a free pass to borrow infinitely. You must still prove to the lender that your business makes enough money to cover the monthly repayments
• For Them: If your business has a bad month and you miss a payment, the lender will approach them for the money. If neither of you can pay, their home could eventually be repossessed to pay off your accrued debt
• Credit Scores: If you miss a payment, it damages both your credit scores*, not just yours. You should make sure your guarantor totally understands this risk

6. The Exit Strategy: how to remove your guarantor

Your long-term goal isn’t to have your guarantor on the mortgage for the full term. Think of them as a stepping stone to getting a whole mortgage in your sole name.

This is a rough guide to the thought process you should look to actuate:

1. Buy the house now using a guarantor
2. Build your business history: spend the next 2–5 years filing solid accounts and increasing your net profit or salary/dividends, whilst maintaining impeccable credit
3. Remortgage: once your accounts are strong enough to satisfy a lender on your own, you remortgage to a standard mortgage deal. You thereby “release” your guarantor from their obligation

7. *Can I do this with Bad Credit?

Getting a guarantor mortgage with questionable credit is harder. Much harder.

If you have bad credit and are self-employed, all lenders will consider you “high risk.” Adding a guarantor with perfect credit reduces that risk, but won’t eliminate it.

There are specialist bad-credit lenders out there. But to even get them to look at your application, your guarantor must have perfect credit. If both of you have bad credit, you will almost certainly be rejected.

Get a copy of your credit report

Lenders use the three main credit reference agencies to get your and your guarantor’s credit scores:

• Experian
• TransUnion
• Equifax

You could subscribe to all three. But we recommend CheckMyFile. They combine all three credit reports into one document. You can see at-a-glance exactly what a mortgage underwriter will see.

You wouldn’t believe how many applicants approach us without first getting this crucial information. Our separate guide explains exactly why every mortgage applicant should get a copy of their credit report. Don’t leave home without it!

Summary Checklist

Before proceeding with a guarantor mortgage application, run these three questions through the mixer:

• Do you have a willing family member? (Parents are best)
• Do they own their own home? (With plenty of equity)
• Do you have an “Exit Plan”? (Are your business accounts likely to look better 3-5 years from now?)

If you can answer yes to all of these, it’s time to get in touch with a broker. We can help interpret your income in its best light to specialist underwriters.

Since 2004, we’ve developed robust networks with specialist lenders. Give one of our brokers a call to start the conversation. They’ll help you see that, even though you’re an independent business owner, some things are better achieved as a team. We’re batting for you!