When you apply for a mortgage, the bank analyses your situation to decide whether to grant it or not. Your savings are a crucial factor because banks usually only finance 80% of the appraisal value of the home. This means that your savings need to represent around 30% of the value of the home to cover the part that the bank doesn't finance: 20% for the actual home and the remaining 10% for related expenses.
Some people haven't saved that amount when they apply for a mortgage, but Spain's Mortgage Act provides for other options in these cases. One them is a guarantor mortgage.
How does a guarantor mortgage work?
If your initial capital doesn't cover that 20% or 30% of the value of the home you want to buy, some banks will offer you a guarantor mortgage. With this type of mortgage, as well as applying for 80% of value of the home you can guarantee the remaining 20% with another property that you own yourself or that a third party owns.
For example, let's say you want to buy a home valued at 300,000 euros. The guarantor mortgage would be applied to 80% of the home, i.e. 240,000 euros, and 20% to the second property, guaranteeing the remaining 60,000 euros. Once you had paid back the first 60,000 euros, the second property would be released from all liens and at that point you would start amortising the main property.
With this type of mortgage, it's important to remember that the guarantor, i.e. the owner of the property that provides the 20% guarantee, could lose that percentage of their asset if you default on your mortgage. Some banks may also require an additional guarantee, in which case the owner of the second home can't act as guarantor.