John Fitzsimons
Tim Leonard
If you are a first-time buyer struggling to build up a sizeable deposit or an existing homeowner with little equity in your property, the government launched the mortgage guarantee scheme in April 2021 to try to help you. Its aim is to try to increase the number of 95% loan-to-value (LTV) mortgages available to those with a 5% deposit, giving them a better chance of getting on to the property ladder or being able to move if they already own a home.
Read on to find out more about how the mortgage guarantee scheme works.
What is the mortgage guarantee scheme?
The mortgage guarantee scheme is designed to persuade lenders to offer mortgages to buyers with a deposit of as little as 5%. The incentive for lenders to do so comes in the form of a government promise to effectively cover their losses if the mortgage goes wrong.
The scheme should mean that more borrowers will be able to get up to a 95% LTV mortgage, leaving the remaining 5% of the loan to be paid by the borrower in the form of a deposit.
This programme is different from the mortgage guarantee scheme that expired in 2016 as part of the Help to Buy programme.
When will the mortgage guarantee scheme end?
The mortgage guarantee scheme is set to run until the end of 2023, a year longer than originally planned.
When the scheme was launched in April 2021, its scheduled end date was 31 December 2022. However, with the deadline nearing, the government decided to extend the scheme by a year.
How does the mortgage guarantee scheme work?
One of the main reasons lenders tend to be less willing to take on borrowers with only a small deposit is that they view these loans as being riskier — a 5% deposit is low compared to more traditional 10% to 20% or larger deposits.
The mortgage guarantee scheme aims to remove some of that risk to lenders, as the government will compensate them for a portion of the losses they incur if a borrower falls behind on repayments to the point that the lender has to repossess the property.
The idea is that by reducing this risk, lenders will be more comfortable offering low-deposit mortgages.
Importantly, there is no direct benefit to you as a borrower from the guarantee scheme. So if you fall behind on your repayments, the lender can still repossess the property. It’s simply that a large chunk of the money the lender loses as a result of having to repossess the property is guaranteed by the government.
Who can qualify for the mortgage guarantee scheme?
The mortgage guarantee scheme isn’t limited to first-time buyers. Lenders are allowed to offer low-deposit mortgages backed by the scheme to those who are already on the housing ladder too.
However, the scheme has been designed specifically to help people looking to buy a residential home they intend to live in. This means buy-to-let mortgages are not available under the scheme.
Lenders may also set their own criteria. For example, some lenders won’t offer 95% deposit mortgages under the scheme if you want to buy a new-build flat.
What else affects mortgage guarantee scheme eligibility?
Mortgages offered under the scheme can be used for home purchases worth up to £600,000, and will be available at between 91% and 95% LTV. In other words, you will still need a deposit of between 5% and 9%.
The guarantee scheme will also only apply to capital repayment mortgages, which means that your monthly repayments will go toward paying both the interest and the balance of the loan. So you can’t get an interest-only mortgage through the scheme.
It’s up to the individual lenders offering loans through the scheme to design exactly how those mortgages will look. However, any lender participating in the scheme must offer a five-year fixed rate under the guarantee. This is so that borrowers with small deposits can also enjoy the security of predictable payments for a longer period rather than simply a couple of years through a two-year fixed rate.
» MORE: How a fixed-rate mortgage works
The pros and cons of a low deposit mortgage
Mortgages that are offered at high LTVs are something of a lifesaver for many borrowers. It’s easier for a borrower to save for a deposit of 10% compared to a 25% deposit, for example, enabling these would-be homebuyers to proceed with their purchasing plans and either get on to the ladder, or move up a rung to a new property.
There are some downsides to consider, though. For example, mortgages offered to borrowers with small deposits tend to come with higher interest rates, which means the size of your monthly repayment will be bigger than it would be if you were eligible for a lower rate by making a larger deposit.
You are also at greater risk of falling into negative equity. This is when the size of your mortgage is more than the value of your property, which can create problems. For example, it might mean you struggle to get a remortgage deal when your initial fixed-rate deal comes to an end. This could leave you with little alternative but to move on to your lender’s standard variable rate (SVR), which is almost always more costly.
Similarly, moving house might be difficult as the sum raised from the sale won’t always be enough to pay off your outstanding mortgage, let alone provide you with a deposit for the next property you want to buy.
If you buy a property with a larger deposit – say 20% – then even if the value of the property falls, it is unlikely to drop so sharply that you end up in negative equity. But if you buy a property with a 5% deposit, then the value of your home does not need to fall by much to leave you in negative equity.
» MORE: How to get a low-deposit mortgage
Do I need to apply for the mortgage guarantee scheme?
Borrowers don’t directly have to apply for the scheme. To take advantage of the scheme, you simply need to apply for a 5% deposit mortgage from a lender who is participating in the scheme.
You might apply directly with the lender or prefer to make use of the services of a mortgage broker.
These independent advisers can direct you towards the most appropriate mortgage for a borrower in your circumstances, as well as the lenders that are most likely to accept your application.
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