In the budget announced this week, Chancellor Rishi Sunak confirmed that the Government was launching a mortgage guarantee scheme that will aim to make it easier for those with a 5% deposit to buy a home.
Here we look at how to get a mortgage with a 5% deposit through the new mortgage guarantee scheme.
The Government has revealed that the mortgage guarantee scheme will be launched in April 2021, however the exact date has not been announced yet. The scheme is set to end on the 31 December 2022, giving those interested in using the scheme 20 months in which to apply for a mortgage.
Under the mortgage guarantee scheme, those looking to buy a property with a 5% deposit will be able to apply for a 95% loan-to-value (LTV) mortgage deal with participating lenders. The scheme is available on properties costing a maximum of £600,000. To encourage lenders to offer 95% LTV mortgages, the Government will act as a guarantor, meaning that if the homeowner fails to keep up with repayments the Government will cover the costs. Those applying for a mortgage through this scheme need to be aware, however, that this guarantee only protects lenders against the costs involved in repossessing a property, such as selling it on at a lower price, so if they do fall behind on mortgage repayments, they could end up losing their home as with a standard mortgage.
When the Chancellor officially announced the scheme during the budget, he revealed that Lloyds, NatWest, Santander, Barclays, HSBC and Virgin Money were all lenders prepared to offer mortgages through the scheme.
Overall, the scheme seems to have had a positive welcome with lenders and more banks and building societies are considering offering mortgages through the scheme.
Commenting on the scheme, Robin Fieth, CEO of the Building Societies Association, said: “The Chancellor has recognised the difficulties faced by many, especially young people, who struggle to save a deposit to buy a home. This can be a substantial barrier for many trying to realise their dream of homeownership whilst meeting the cost of rent and other living expenses. The Government-backed guarantee for those who have just a 5% deposit is welcome news and this scheme will run alongside private sector solutions to the low deposit problem. A number of building societies have already re-entered the 90-95% mortgage market in past months and demand is likely to remain high.”
When the pandemic began impacting the UK economy last year, many mortgage lenders withdrew mortgage deals from the market. Although some 90% LTV deals have returned, the number of deals available at 95% LTV remains very low. Mortgage lenders may be cautious about offering deals at 95% LTV, which requires just a 5% deposit, as these mortgages are considered risker than mortgages at a lower LTV. In addition to this, borrowers buying a property with a 5% deposit have a significantly higher risk of falling into negative equity (when the mortgage on their home is more than the property is worth) if house prices fall significantly.
Saying this, for many would-be homeowners, buying a property with a 5% deposit is their only option for getting onto the housing ladder. As such, the Government has introduced the mortgage guarantee scheme to encourage lenders to offer mortgages at 95% LTV.
“It is a step in the right direction to hear that the Government has introduced a new scheme incentivising lenders to reintroduce 95% mortgage deals once again,” explained Brian Murphy, head of lending at Mortgage Advice Bureau. “High LTV mortgages have dropped in numbers during the pandemic for a variety of reasons, which has created a significant barrier to homeownership for first-time buyers, so this scheme will help get the country back on track to turn Generation Rent into Generation Buy.”
The mortgage guarantee scheme is available to both first-time buyers and those who have already owned a property. It is likely that in order to be accepted for a mortgage through the scheme, applicants will have to meet the same affordability and eligibility requirements that would be needed for a standard mortgage.
At the moment, we do not know what the mortgage interest rates will be on the deals available through the mortgage guarantee scheme. As many well-known, high street banks have said they will offer deals through the scheme it is likely that the rates will be competitive, although they may be higher than deals not within the scheme as it is likely that lenders will have extra administration costs to cover and a government fee for the guarantee on deals under the scheme. As well as this, mortgage deals at 95% LTV tend to be higher than rates on deals at lower LTVs.
We do know that mortgages through the scheme will be available as a fixed rate deal for up to five years.
Although no information has been provided yet about how borrowers can apply for a mortgage through the mortgage guarantee scheme, it is likely that the mortgages will be available through a mortgage broker and directly through the lender. When the mortgages become available, they will be listed on our 95% LTV first-time buyer chart and those considering this option should visit our chart in April to see what deals are available.
Alternatively, mortgage borrowers could consider speaking to our preferred mortgage broker, Mortgage Advice Bureau, to discuss whether it is the best option for them and what deals are available.
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