The New 2021 Mortgage Guarantee Scheme
The Chancellor Rishi Sunak announced the new mortgage guarantee scheme to help people with small deposits get on the property ladder in the March 2021 Budget.
The aim of the scheme is to offer incentives to lenders, and bring back 95% mortgages which have drastically decreased during the pandemic.
The new mortgage guarantee scheme will enable all UK homebuyers secure a mortgage up to £600,000 with a 5% deposit and it is hoped that this initiative will kickstart the housing market.
Although this is much needed boost to many first-time buyers who want a place of their own, there are fears that the scheme may also push up prices in the longer term.
While the scheme protects the banks funds against a house price crash, it doesn’t cover the homebuyer against any risk.
For the latest developments, information and mortgage guarantee scheme news about this upcoming initiative please bookmark this resource!
New Mortgage Guarantee Scheme
The Mortgage Guarantee Scheme is a government initiative to help first-time-buyers get onto the property ladder. Many first-time-buyers will have less than a 10% deposit saved, usually around 5%.
Other similar schemes were set up in the past to help first-time-buyers, is this one any different?
This guide is to help you understand what the scheme is, how it works and if it is right for you.
What is the New Mortgage Guarantee Scheme about?
The Mortgage Guarantee Scheme was first announced in the Spring Budget, March 2021 and officially launched on 1 April 2021.
The purpose of the scheme is to offer people the opportunity to buy a new build or existing property by giving them access to mortgages without the need of a large deposit.
The way it works is that the government guarantees part of the mortgage - the part that is over 80% of a 95% mortgage which is 15%. So, if a borrower defaults on the mortgage or the property is repossessed, the government will partially compensate the lender. The compensation covers the administration costs a lender incurs in these situations. These costs would ordinarily be recoverable from the borrower.
During the Covid pandemic, 95% mortgages (also known as high loan-to-value mortgages) were withdrawn by most lenders due to the high risk attached to them and because of financial uncertainty. The situation is reminiscent of that after the 2008 financial crisis when lenders withdrew such mortgages leading to a shortage of 95% mortgage deals.
However, due to the government's actions in 2013 and the launch of the Help to Buy scheme, the number of high loan-to-value mortgage products increased. This allowed people with small deposits to purchase homes. The scheme ran successfully until 2016.
The principles of the Mortgage Guarantee Scheme are like that of Help to Buy, in that lenders are being incentivised to introduce more 95% mortgages but have a guarantee of partial compensation from the government if things go wrong.
Why has the Government Launched a New Scheme?
Lenders are risk averse which is why many withdrew their 95% mortgages for first-time-buyers. This was seen at the start of the Covid pandemic in March 2020 when the number of small deposit mortgages fell drastically.
The effect of this was felt by those who could not afford a 10% deposit. This meant fewer or no mortgage options during the pandemic were available to them.
This is when the government stepped in with the Mortgage Guarantee Scheme to give lenders confidence in offering high-loan-to-value mortgages to their customers once again.
Who Can Apply?
The scheme is available to first-time-buyers and existing homeowners looking to move. Some homeowners looking to move may find it hard to save for a larger deposit because of lender requirements or cannot get a competitive re-mortgage deal due to low equity in their current property.
Other eligibility criteria include:
- The property being sought must be for the homeowner to live in - second homes and buy-to-lets are not permitted in the scheme.
- The houses can be new-builds or existing properties, up to £600,000 in price.
- The mortgage type must be repayment - interest-only mortgages are not permitted in the scheme. All affordability checks, credit assessments and loan-to-income tests must be satisfied.
- The mortgage applied for will need to have a loan-to-value of between 91% and 95%.
How to Apply for the New Mortgage Guarantee Scheme?
Once you have saved enough for a 5% deposit (or more) and have found a property you would like to buy, you need to then find a mortgage lender who offers 95% mortgages.
To do this it is best to find a broker who specialises in low deposit deals. The broker will assess your needs and circumstances and will know which lenders are offering the best rates. From this they will be able to find a lender best suited to offer you a mortgage deal.
How long New Mortgage Guarantee Scheme run?
The scheme started accepting new mortgage applications on 1 April 2021 and will run until December 2022. However, a review of the scheme will take place before the end date.
If the scheme is successful, it is possible that it may be extended. This will be dependent on the uptake of high LTV mortgages and evidence that prospective homeowners will further benefit.
Which Lenders are Participating in the New Mortgage Guarantee Scheme?
The main high street banks such as NatWest, Lloyds, Santander, Barclays and HSBC will be part of the scheme and have all agreed to launch 95% mortgage products.
The Mortgage Guarantee Scheme requires lenders to offer a five-year fixed-rate mortgage. This will give borrowers the security of predictable repayments for a longer period.
Are there any alternatives to the New Scheme?
Standard mortgages usually require a 10% deposit. Depending on where you are looking to buy, house prices can vary a great deal, making it difficult to save for a 10% deposit. Therefore, people look for a 95% mortgage as saving for a 5% deposit is more achievable.
As well as the benefits of a 95% mortgage, there are also some drawbacks.
Borrowing a higher proportion of the house price means a higher the rate of interest is charged on the mortgage.
With that in mind, if you can save longer for a larger 10% deposit, a lot more mortgage options are open to you. This may be cost-effective in the long run.
With more 95% mortgage deals on the market, due to the new scheme, interest rates of other mortgage products may drop as a result.
In addition to this scheme, there are other options for those who have a small deposit to consider, these include the following schemes:
- Help to Buy - this scheme is available in England only and involves the government offering first-time-buyers a 20% equity loan to purchase a new-build property (regional caps will apply). A version of this scheme is available in Wales. However, Northern Ireland and Scotland have no such scheme in place.
- Shared ownership scheme - the scheme is primarily aimed at first-time-buyers and low-income families. This may also be an option if you are looking to purchase property in an expensive area like London. The scheme allows you to buy a stake in a property, usually between 25% - 75%. You will jointly own the property with a Housing Association and pay them rent on their share of the property. You can increase your stake in the property over time through a process called 'staircasing'. This is a way of getting on the property ladder but be careful about the likelihood of high monthly costs.
- Guarantor mortgages - these mortgages let a parent or family member help you buy a home. As the name suggests, the willing family member acts a guarantor on your mortgage. Their savings or home will be used as collateral if you default on the mortgage.
- Joint borrower sole proprietor mortgages - these mortgages are like guarantor mortgages in that a family member is jointly liable for the mortgage payments, but only you own the property.
- Lifetime Isa's - this Isa is a great way to save for your first home. A Lifetime Isa allows you to save up to £4,000 a year. As a bonus the government will give you an extra 25% to boost your savings. The Lifetime Isa must be held for a minimum of one year and the property must cost less than £450,000.
The new mortgage guarantee scheme will run until December 31 2022 so, there is a limited window to apply. Mortgages are available from a variety of lenders including major high street banks to eligible applicants.