The government-backed mortgage guarantee scheme launched in April, but we know here at the Online Mortgage Guru there are still burning questions you have.
We covered the initial scope of the scheme back in our ‘Mortgage Guarantee Scheme: What you need to know’ article where we covered things like:
- What the Mortgage Guarantee Scheme is
- How the Mortgage Guarantee Scheme will work
- What lenders are offering the scheme, and
- How long the scheme is available for
But now the scheme has launched we’ve got more to add.
As a reminder, the mortgage guarantee scheme offers potential homeowners the chance to step onto the housing ladder by re-introducing 95% mortgage applications.
The government will give a partial guarantee to the mortgage lender of up to 15% if a borrower defaults on their repayments. Meaning the risk to them lending on a 5% deposit is reduced.
It’s also open to not only first-time buyers but those looking to move house too. The stipulations being that it is a residential mortgage for individuals and that it should be for under £600,000.
The scheme will further only be available for applications until December 2022.
How does the Mortgage Guarantee Scheme work?
Providing you fall into the eligibility criteria for the scheme you can apply for a mortgage with any of the lenders who are signed up for the scheme.
But how does it work in practical terms?
Those lenders signed up to the scheme will have signed up for the government to compensate them for a portion of the net losses suffered in the event of a repossession according to a government press release details on the scheme. It will not apply for the whole amount but will apply down to 80% of the purchase value of the property.
How does that work?
If you were purchasing a £100,000 property you would put a deposit of £5,000 down – 5%. Your lender would loan £80,000 and the additional 15% would be through the mortgage guarantee scheme (thought lenders will have to take a 5% share of net losses above 80% if there was a foreclosure – meaning £14,250 would be through the guarantee scheme and £750 through the lender).
How long will I have the mortgage guarantee for?
If you take out a mortgage as part of the mortgage guarantee scheme, the guarantee will be valid for up to 7 years after you took the mortgage out.
This is because evidence has shown that loans are unlikely to default after this time.
Furthermore, if you’d have taken out the mortgage on a repayment basis the likelihood is that you’ll have you would have repaid sufficient capital to have 20% equity (or more) meaning that the guarantee would no longer offer any protection.
How much deposit will you need?
The mortgage guarantee scheme has re-introduced 5% deposits to the market. Meaning that essential you only need 5% of the value of the property to apply for a mortgage.
In practical terms, it means that if you wanted to buy a £200,000 property you’d only need to save £10,000 instead of saving 10% at £20,000.
This makes the upfront costs of buying a home lower, reducing the cost of stepping onto the property ladder.
However, you will still need to bear in mind other costs such as valuations, surveys, legal fees and stamp duty.
What kind of rates can you expect?
As with any loan, the higher the risk to the lender the higher the rates tend to be.
According to Zoopla the deals being offered by lenders tend to be along:
For the best two-year deals:
- Natwest is offering 3.9% – no fees
- Barclays is offering 3.99% – fixed rate – no fees
- Santander is offering 3.99% – tracker rate – no fees
- Halifax is offering 3% – fixed rate – no fees
For the best five-year deals:
- Coventry Building Society is offering 3.89% – £999 fee
- Leeds Building Society is offering 3.99% – £999 fee
- Yorkshire Building Society is offering 3.99% – £995 fee
Overall the scheme aims to drive activity within the market to keep things moving in the wake of the pandemic. According to a quote from Christopher Pincher, it will give more people the choice to get on the housing ladder:
‘As we continue to re-build after the pandemic, we want as many people as possible to have the choice to get on the housing ladder. More homes were delivered in 2020 than any year since 1987 and we need mortgages to be affordable. This scheme will give more people the choice to buy and keep the Government’s commitment to delivering homes across Britain.’
It’s a boost for buyers, but the government will be paying attention to the impact the scheme has on house prices, particularly if the scheme starts to push up prices in the long run.
If you’re considering taking advantage of the scheme it’s worth talking to an expert mortgage advisor who can explain what your options might be and who already know the best deals on the market.
They will also have access to other lenders who may have better deals for you who aren’t a part of the scheme but have launched 5% deposit mortgages independently.
Contact us at Online Mortgage Guru on 0345 3669799 or email us via firstname.lastname@example.org and we will put you in touch with a suitable specialist to handle your enquiry who has experience handling cases such as yours.