95% Mortgage Guarantee Scheme – what you need to know!
The Budget this week was a notable one for anyone looking to buy a home, and not just because of the government’s decision to extend the Stamp Duty holiday. That’s because the Chancellor also announced a new mortgage guarantee scheme, aimed at helping people purchase a home who only have a deposit worth 5% of the property’s purchase price.
How does the guarantee scheme work?
Getting a deposit together is one of the biggest challenges any property buyer faces, but particularly for first time buyers.
It’s made all the harder when house prices continue to rise. According to Nationwide, the average property price is now £231,061 – the highest on record – having jumped by 6.9% over the last 12 months. The speed of that increase means that even if you are saving each month, it’s getting tougher to get a deposit in place.
So the government has come up with the mortgage guarantee scheme, as a way of encouraging more mortgage lenders to provide mortgages to borrowers with relatively small deposits. A mortgage guarantee scheme was introduced back in 2013, and this new version runs in much the same way.
Here’s how it works. If a lender offers mortgages to borrowers with smaller deposits – we’re talking in the 5% to 9% range here – then the government will provide them with a guarantee that it will step in and cover the losses a lender faces if the loan goes wrong and they have to repossess the property.
The thinking is that this guarantee effectively removes some of the risks in offering this high loan-to-value (LTV) mortgages that might ordinarily put lenders off, making it more attractive for them to lend home loans to would-be buyers who have smaller deposits.
What mortgages qualify for the mortgage guarantee?
The guarantee is in place for mortgage loans of between 91% and 95% of the property’s value, and for properties worth up to £600,000.
Importantly it can only be used for residential purchases – so the guarantee isn’t in place to help landlords purchase homes as an investment – while it’s not limited to first-time buyers either, so even if you are looking to move up the ladder rather than simply get on it, it could prove useful.
Mortgages covered by the guarantee have to be repayment mortgages rather than interest-only, so all of your monthly repayment will go towards clearing the money you’ve borrowed, while you will still need to meet the usual affordability tests to prove that you can actually afford those repayments.
Can I move now?
The mortgage guarantee scheme launches in April and will be in place until December 2022.
Obviously, it’s hugely encouraging that the Government has announced this new scheme to encourage more lending at high LTVs, but the truth is that you don’t need to wait for its launch to get moving with your home purchase.
While it’s true that the number of mortgage products open to borrowers with small deposits has dropped over the last year, there are plenty of lenders who will consider you. They just might not be lenders that are household names, or who offer their mortgages directly to borrowers.
What’s more, there are schemes in place, from Help to Buy to shared ownership, which can also help you onto the housing ladder even if you only have a smaller deposit.
That’s why working with a quality mortgage broker is so invaluable. Brokers have a great insight into the market and understand precisely which lenders will consider your case, and which products might work for you, no matter what size deposit you have at your disposal.