We’ve been hearing about speculation over the new mortgage guarantee scheme and the outcome of the Government Budget announcement for weeks, if not months. But, after Wednesday’s address, we’re all now firmly looking at the prospect of a new mortgage guarantee scheme that will see 95% mortgages return to the table.
Up until last year, there were a healthy amount of low deposit mortgages on the market for first-time buyers. However, we all know that the impact of the pandemic caused ripples across the housing market, resulting in lenders pulling their lower deposit, higher risk, mortgages off the shelf leaving borrowers in limbo.
Last Wednesday’s budget announcement, however, has pushed lenders to step up and seeks to support buyers to get onto the property ladder.
But, what does it all mean? How is it going to work?
We’ve taken a look at the proposed Government Mortgage Guarantee Scheme and are here to give you the lowdown.
What is the Mortgage Guarantee Scheme?
In his own words, Rishi Sunak described the new policy as one that “gives people who can’t afford a big deposit the chance to buy their own home.” Living in a time of generation rent the government, over the years have tried to turn that around and to push buyers onto the ladder using government-backed schemes like Help to Buy.
As we’ve said, over the last year we’ve seen higher loan to value (LTV) mortgages all but disappear. A vast amount of lenders have been offering a maximum 90% mortgage, meaning that prospective buyers need a minimum 10% deposit.
As a consequence, it’s made it more difficult for first-time buyers to get on the property ladder as its often difficult to save up a large enough deposit. It’s also made it difficult for current homeowners who have low levels of equity in their property to move or remortgage.
The new mortgage guarantee scheme will mean that buyers will see a return of 95% mortgages to the market from April, available to all borrowers, not just first-time buyers, on properties up to the value of £600,000.
As per the released document ‘The mortgage guarantee scheme: outline’ this new scheme intends to replicate the 2013 Help to Buy scheme which successfully saw over 100,000 buyers purchase their own home.
The scheme will provide those lenders who choose to purchase a government guarantee, which means they will be compensated for a maximum 15% portion of their losses should a borrower default on their loan and their home repossessed.
As per the outline, they intend the scheme align with overarching principles that:
- Are focused on helping borrowers in a way that is simple
- Is as straightforward for lenders as possible administratively
- Doesn’t incentivise irresponsible lending
- Contains a level of risk being taken by the government
- Can be put in place rapidly and effectively
How will the Mortgage Guarantee Scheme work?
So how will the scheme work?
As 5% deposit mortgages are considered a higher risk to lenders which is why we’ve seen a scarcity of them recently. The new scheme offers lenders a guarantee that if you fail to meet repayments and your property is repossessed the government will cover 15% of the property value, easing some of that risk to the lender.
However, the scheme is not open to everyone and the government have set out their eligibility for the scheme as follows:
- Only available on residential mortgages – not second homes or buy-to-let properties.
- Only to be taken out by individuals and not incorporated companies.
- Be for a property in the UK of £600,000 or less.
- Should be for an LTV of between 91% – 95%.
- Only on eligible applications between April 2021 – December 2022.
- It must be a repayment mortgage and not an interest-only.
Providing your application falls within these categories you will be eligible for the scheme. However, you will also need to bear in mind the usual requirements and criteria of the lender in terms of your affordability and credit file status.
Knowing what your credit rating is and ensuring it is correct as well as knowing exactly how much your expenditures are will be paramount when applying for your mortgage.
Note: You can use sites such as Check My File to view all 3 of the main credit reports lenders will view.
What lenders are offering the mortgage guarantee scheme?
Several lenders have already confirmed their sign up to the scheme, including mainstream lenders such as:
- Santander
- Barclays
- HSBC
- Lloyds Bank
- Natwest
They have all committed to launching 95% mortgage deals from April.
This doesn’t mean that other lenders won’t be following suit, so speaking with a mortgage advisor with access to whole of market would be able to advise on any further lenders who will be offering these mortgage products.
How long is the scheme available for?
To start, the scheme is only intended as a temporary measure to boost the market in response to the pandemic and the current scarcity of low deposit, high LTV loans. Applications will be accepted from lenders between April 2021 – December 2022. That doesn’t mean that the government won’t extend the scheme when it is reviewed.
Are there any government schemes available to buyers?
Whilst the mortgage guarantee scheme has been widely welcomed there is speculation that house prices could inflate due to the scheme. It, therefore may not be the right solution for everyone.
There are, however, other government schemes you can consider:
- First-time buyers can benefit from a Lifetime ISA (LISA). From 2017, adults under the age of 40 have been able to open a LISA and save up to £4,000 a year until they’re 50, at which time you’ll receive a 25% government bonus on the savings. The terms of these LISA’s though mean that funds can be withdrawn to purchase your first home 12 months after opening it.
- If you hold a Help to Buy ISA you can also continue to save until November 2029 to claim a maximum £3,000 government bonus.
- You can apply for a government Help to Buy equity loan of up to 20% of the value of the property, providing you have a 5% deposit. This is a low-interest loan that must be paid back within 25 years.
- Shared ownership purchases can be made with a housing association. A scheme that means you buy a share of your home between 25% – 75% and pay rent on the rest.
Speaking to a mortgage advisor about the available schemes, including the mortgage guarantee scheme, and finding out whether you’re eligible is a good place to start. They’ll be able to explain your mortgage options and compare thousands of deals to help you navigate the market and help you achieve your dream of owning your own home.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via info@theonlinemortgageguru.co.uk and we will put you in touch with a suitable specialist to handle your enquiry who has experience handling cases such as yours.
