5% Deposit Mortgage Guarantee Scheme
What is the Mortgage Guarantee Scheme?
A new Mortgage Guarantee scheme was launched in April 2021 in response to a dramatic decline in mortgages obtained by applicants with a smaller deposit throughout 2020. The scheme’s main goal is to encourage Mortgage Lenders to offer higher Loan to Value lending, following an industry-wide loss in confidence to do so, throughout the coronavirus pandemic.
The reduction in lenders offering 95% mortgages has reportedly impacted First Time Buyers the most, given that they are the demographic most likely to struggle to save larger deposits. The scheme is expected to increase the availability of low deposit mortgages for First Time Buyers, but it’s also available to all creditworthy mortgage applicants looking to buy a home, which will be reassuring given the rise in house prices over recent months.
How does it work?
Allows lenders to obtain a government-backed guarantee for 91% or higher Loan to Value mortgages
The Mortgage Guarantee Scheme offers mortgage lenders the option to purchase a low-cost financial guarantee in return for offering mortgage deals to borrowers at 91-95% Loan to Value and at a Fixed-rate for at least five years. This guarantee protects Mortgage Lenders from losses in the event that your home is repossessed, however, it offers no protection to you as the borrower.
The main benefit to borrowers is that if you’ve struggled to find a suitable mortgage due to having a low deposit, the availability of 91%-95% mortgages will now allow you to secure a mortgage with a deposit as low as 5%. The five-year fixed-term interest rate is a great way to budget carefully for the future.
Responsible lending encouraged
To prevent Mortgage Lenders from taking liabilities with the guarantee, by lending more than borrowers can comfortably afford, the government has included a clause in the policy, stating that lenders are liable for 5% of any losses incurred from homes bought through the Mortgage Guarantee Scheme.
Does The Mortgage Guarantee Scheme have other criteria?
In order to offer a mortgage under the guarantee scheme a lender must:
- Only offer residential mortgages for a first and/or only home (not Buy-to-Let)
- Only offer it to individuals, incorporated companies are not eligible
- Ensure it is for a UK property valued at £600,000 or less
- Offer a 91-95% Loan to Value mortgage
- Originate the mortgage between April 2021 and Dec 2022
- Only allow Repayment Mortgages, not Interest-only
- Subject all applicants to affordability checks and a credit score test
Do I need a good credit history to access a 95% Mortgage via the Mortgage Guarantee Scheme?
Mortgages offered under the scheme must be based on responsible lending, so you will have to meet the lender’s acceptance criteria for a standard residential mortgage. All lenders must subject the applicant to affordability and credit score checks as part of the policy terms. A higher credit score will be needed in order to secure lending of 91 – 95% Loan to Value.
How do I improve my credit rating?
The first step is to check your credit score with a credit reference agency. If you need to improve it prior to making an application, check that all information held on your file is correct. Rectify mistakes and ensure you’re on the electoral roll at your current home address. It’s also important to reduce any debts and put off applying for further credit until after your application.
What other fees will I need to pay?
Stamp Duty is paid on UK property sales of over £300,000 under normal circumstances. However, the current Stamp Duty tax suspension on properties up to the value of £500,000, has now been increased until the end of June 2021.
A mortgage calculator can sometimes help you to determine the costs involved with buying a house, however, these are non-standard and will vary between different firms. You should be prepared to pay solicitors fees, mortgage arrangement fees, and the cost of searches and surveys for your new property, on top of your deposit.
How can Ideal Home Loans help?
At Ideal Home Loans, our team of Mortgage Brokers are updated daily with new mortgage deals from a wide pool of high street and independent mortgage lenders. We can help you to access those offering high Loan to Value mortgages under the new Mortgage Guarantee Scheme as soon as they’re available.
We can take care of the administrative aspect of your mortgage application, whilst ensuring you make the most of the deals available to you.
Please remember your home is at risk if you do not keep up repayments on your mortgage