Launched as part of the UK Government’s 2021 Spring Budget, the mortgage guarantee scheme aims to help people either get onto, or move-up, the property ladder, allowing credit-worthy households to secure a mortgage with only a 5% deposit.
Like the Help to Buy scheme launched in 2013, which helped to restore low deposit mortgages after the financial crisis, the scheme aims to help those members of ‘generation rent’, who can afford mortgage repayments but not the initial large deposit.
During the Coronavirus pandemic, due to the economy struggling, almost all banks withdrew any 95% mortgages that they offered, and the new scheme encourages lenders to begin providing them again. Under the terms of the scheme, the government guarantees a portion of the mortgage, meaning the government will partially compensate the lender if the homeowner were to default on their mortgage.
The scheme is for lenders to participate in, with buyers then benefitting from it. Currently many of the high street banks are taking part in the scheme, so as a buyer, all you have to do is look out for which banks offer the 95% mortgages and chose which lender suits you. Interest rates on all mortgages are set by the lenders themselves, so this may differ from lender to lender. As low-deposit mortgages come with a higher risk for the lenders, most will have stringent eligibility criteria in place which will take into account your income, expenditure, credit-history, age and the property you are looking to purchase.
The scheme will be available to first-time buyers and existing homeowners looking to purchase a property up to £600,000, and unlike previous government schemes this one is not limited to only new-build properties. However, the property must be a primary residence, so not a second home, or a buy-to-let investment. The scheme will only be available on repayment mortgages (not interest-only), and the loan-to-value (LTV) will need to be between 91%-95%. There will also be standard affordability checks to pass including a credit score assessment and loan-to-income tests.
The scheme is set to initially run to 31st December 2022, but due to the surge of popularity of the scheme, the government has promised to consider an extension once it is scheduled to end. The intention of the scheme cannot be faulted, however by adding this safety net for lenders, this has opened the market up to an onslaught of new potential buyers. This increased demand is not met with an immediate increase in supply, and as a result, house prices are expected to rise. This may leave the people that this scheme was initially intending to help, priced-out of being able to buy a property. Nevertheless, the mortgage guarantee scheme does provide additional options for more people to becomes homeowners and will hopefully help many individuals and families step onto the first rung or move up the property ladder.