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The mortgage guarantee scheme is a temporary government initiative designed to encourage lenders to increase the number of low deposit options available to those looking to buy a property. The scheme will run from April 2021 to December 2022.
The scheme allows lenders to purchase a government guarantee against a low deposit mortgage. If the borrower is unable to keep up repayments, the government will compensate the lender for a portion of their losses.
The guarantee scheme is designed to support mortgages with a loan-to-value of between 91% and 95%. This means a borrower would only need to put forward a deposit of between 5-10% of the value of the property.
In practice, borrowers will see no difference if their mortgage falls under the scheme. You'll make your mortgage applications in the same way, and will still be liable to make your mortgage payments each month. And, if you fail to keep up with their repayments, your home may be repossessed - as with a normal mortgage.
The guarantee scheme is solely designed to make lending more appealing to banks, who have reduced the number of 95% mortgages available during the period of the coronavirus pandemic.
To be eligible to borrow under the mortgage guarantee scheme, you'll have to fit the following criteria:
Mortgages for commercial properties, or pieces of land, aren't included in the scheme. You also can't apply for this type of mortgage if you intend to rent out the property.
The property you want to buy is based in the UK, and is worth less than £600,000
The loan-to-value (LTV) of the mortgage must be between 91%- 95%
Loan to value is the percentage of the property's value that's covered by the mortgage. A 95% loan to value means that you'll pay 5% of the cost of the property upfront, and the bank will lend you the remaining 95%. For example: if you want to buy a £200,000 flat with a 95% LTV mortgage, you would pay £10,000, as a deposit, and the bank would pay the remaining £190,000. When you make monthly repayments on your mortgage, you're actually buying back this 95% share from the bank.
This means you'll pay back both a portion of your loan, and interest, each month. To read about the other types of mortgages available, head here.
This often takes the form of a credit score check, and assessment of your annual income and outgoings. As a general rule, mortgage lenders will not lend more than 4.5 times your annual income. So, if you earn £30,000, you will be able to borrow a maximum of £135,000.
Individual participating lenders may have additional eligibility criteria too.
Several banks, including Santander, NatWest, and Barclays will not allow you to apply for a 95% mortgage if you're hoping to buy a new build property. This is because many lenders view new builds as a riskier investment, because they are often bought at a premium, and struggle to keep their value in the short term.
Others have placed their own value caps on the mortgage products. For example, Barclays has limited guarantee scheme borrowing against flats to £275,000, and Santander has set their limit against flats at £400,000 - rather than the maximum £600,000 laid out in the government guidance.
For full information on eligibility, we'd recommend talking to each lender, or a mortgage broker. They will be able to assess your individual circumstances, and let you know whether you meet all the relevant criteria.
There may not be much difference, in practice, with paying off a guarantee scheme mortgage, but that doesn't mean there aren't any positives to the scheme. For borrowers, some of the pros include:
'Fixed rate' mortgages have a period of time - usually between 2 and 5 years - where the interest rate is fixed. After this, your mortgage will switch to a 'Standard Variable Rate', which usually follows in line with the Bank of England's interest rate. A fixed rate mortgage makes it easier to plan financially, as you'll not be hit by any surprise increases to your monthly repayments if the Bank of England rate suddenly increases. One of the conditions of the mortgage guarantee scheme is that lenders must offer at least one 5-year 91-95% mortgage product.
As this scheme is designed to increase the number of 91 to 95% loan to value mortgages available, it should increase the number of low deposit mortgage options available to borrowers. If you fulfil all the other affordability criteria this means there'll be a lower upfront cost to buying a house.
Unlike the Help to Buy schemes - which require you to make a financial agreement with the government - this scheme allows you to take out a mortgage in the normal way. There are no special mortgage applications; you won't owe part of your mortgage to the government (as with the equity loan), and you'll own the entirety of the property (unlike with shared ownership).
These low deposit mortgages are available to both first time buyers and home movers
Can be used for 'second hand' properties
Unlike other government schemes - such as Help to Buy - this scheme isn't limited to new build properties.
However, there are some disadvantages too. Before you decide whether to go ahead with one of these guaranteed 91% to 95% mortgages, make sure you also consider the following:
As a general rule, the higher the percentage you borrow against a property, the higher the interest rate on your repayments. This means you may end up paying more overall. Consider whether it's worth saving up a larger deposit, before you commit.
While these mortgages mean you only have to put up a 5% deposit, they don't remove the lending limit of 4.5 times your annual income. This means if you earn an average salary, you may still find it hard to borrow the amount you need to get onto the housing ladder.
For example, if you want to buy a house that costs £200,000, and have a 5% deposit of £10,000, you will need to be earn £43,000 a year in order to qualify. If you earn the UK average of £31,500, you are likely to be eligible to borrow around £141,750. With a 5% deposit, this means you could afford a property worth just under £150,000.
The scheme is temporary, and will only run between April 2021 and 31 December 2022. While it's hoped that many lenders will continue to offer low deposit mortgages after this, without government support, there may still be a drop in the number of products available.
Many lenders have additional criteria for the mortgages that fall under this government scheme. Most have decided that they will not offer low deposit mortgages on new build properties, as they pose too risky an investment for the lender.
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