A common barrier to home ownership for people of all ages is saving for a deposit. However, with the recently announced Mortgage Guarantee Scheme, you may only need a 5% deposit to buy a new home.
Here, we explain how the Mortgage Guarantee Scheme works, and who is eligible to apply.
What is the Mortgage Guarantee Scheme?
Announced in the March 2021 Budget, the Mortgage Guarantee Scheme is a government-backed initiative which incentivises lenders to provide 91-95% loan-to-value (LTV) mortgages for properties up to the value of £600,000.
Loan-to-value is the ratio of the amount you intend to borrow for your mortgage against the actual property value and is usually expressed as a percentage. For example, if the property you intend to buy is valued at £100,000 and you plan to put down a £5,000 deposit (or equity), the amount you would be looking to borrow would be £95,000, which is 95% of your property’s total value.
The scheme will run between April 2021 and December 2022 and a number of major lenders have committed to supporting the scheme, including: Lloyds, NatWest, Santander, Barclays and HSBC.
Why has the Mortgage Guarantee Scheme been introduced?
During the pandemic, the availability of high LTV mortgages plummeted, with estimates that nine in ten 90% plus LTV mortgages were removed from the market.
High LTV lending requires more investment from the lender and therefore poses a higher risk of losing their investment if the borrower doesn’t pay their mortgage (defaults). This risk means that in times of economic uncertainty, such as a pandemic, lenders are less willing to provide high LTV mortgages.
The purpose of the Mortgage Guarantee Scheme is to remove some of the risk to the lender, therefore increasing the availability of high LTV mortgages and encouraging people into the housing market.
How does it work?
For you, the consumer, the Mortgage Guarantee Scheme simply means that there will be more 95% LTV mortgages to choose from.
The mechanics of the scheme involves an agreement between the government and the lender, in which the government will guarantee a percentage of the loan value in the case of a default.
As lenders are not liable for the full cost of any losses incurred if a homeowner can’t pay back their mortgage, this removes some of their risk involved in offering mortgages to buyers with small deposits.
How do you access the Mortgage Guarantee Scheme?
To be eligible for the scheme your mortgage application must be:
- For a property you will be living in, not second homes or buy-to-let
- Taken out by you as an individual(s), not a company
- On a UK property valued £600,000 or less
- A LTV between 91% and 95%
- Originating between April 2021 and December 2022
- A repayment mortgage, not interest-only
- Able to meet the lender’s ability to pay requirements: credit score testing and loan-to-income assessment (generally calculated at 4.5 times your salary, or combined salaries if you are buying the property with someone else).
Things to consider
Although the Mortgage Guarantee Scheme will help many people with small deposits to get onto the property ladder, there are some important things to consider if you’re hoping to use the scheme:
Higher interest rates: Generally, high LTV mortgages attract higher interest rates so there is a risk that these could be substantially higher than those currently available.
Difficulty remortgaging: As you’ll only own a small amount of equity in your home, when the time comes to remortgage, you may struggle to find a competitive deal to remortgage to.
Rising or falling house prices: An increase in prospective buyers may push up house prices, especially if there is limited supply, but once the initiative is withdrawn, there’s a risk this may negatively impact on house prices. Of course, there are lots of other factors which influence which way property prices move, but it’s important to be aware that those with only a small amount of equity in their homes are at greater risk of falling into ‘negative equity’ if prices drop. Negative equity occurs when your property is worth less than the mortgage you have secured on it.
If you’re not sure whether the Mortgage Guarantee Scheme is right for you, or whether there may be alternative mortgage options which might be more appropriate for your circumstances, you may want to consider seeking professional mortgage advice.
There are a number of fee-free mortgage brokers available. We’ve chosen to partner with Fluent Mortgages to offer fee-free advice on the various options that may be available to you based on your individual circumstances. You can request a free, no obligation callback here.