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5% Deposit – The Mortgage Guarantee Scheme
What is the Mortgage Guarantee Scheme?
The government announced in the budget for 2021, that a new Mortgage Guarantee scheme is being introduced in response to a significant decline in mortgages taken out in 2020 by applicants with a low deposit. The Mortgage Guarantee Scheme aims to encourage lenders to offer higher Loan to Value lending, following industry-wide loss in lender confidence as a result of job instability throughout the coronavirus pandemic. The scheme launched in April 2021 and is available until December 2022, but has the potential to be extended.
The lack of lenders offering 95% mortgages has hit First Time Buyers hardest and therefore the main goal of the scheme is to enable them to buy a home without the need for a large deposit. The good news is, however, that the scheme is available to all creditworthy mortgage applicants looking for a new residential home.
How does it work?
Allows lenders to obtain a government-backed guarantee for applicants applying for a 91% or higher Loan to Value mortgage
The Mortgage Guarantee Scheme is a process whereby the government offers a guarantee to Mortgage Lenders in return for them offering mortgage deals to borrowers at 91-95% Loan to Value and at a Fixed-rate period of at least five years.
This means that your Mortgage Lender is protected from losses in the event that your home is repossessed, it offers no protection to you as the borrower. If you’ve struggled to find a suitable mortgage deal in the past year, however, the availability of 91%-95% will allow you to secure a mortgage with a deposit as low as 5%. The five year fixed term interest rate is also very attractive to those applicants looking to budget carefully for the future.
Does not incentivise irresponsible lending
To prevent Mortgage Lenders from taking liabilities with the guarantee, the government has included a clause in the policy, stating that lenders are liable for 5% of any losses incurred from any home you buy with the mortgage guarantee scheme.
What qualifying criteria are there for the Mortgage Guarantee Scheme?
There a number of criteria a lender must stick to in order to offer a mortgage under the guarantee scheme:
- It can only be a residential mortgage for a first and/or only home (not Buy-to-Let)
- Only individuals (no incorporated companies) are eligible
- It has to be a UK property valued at £600,000 or less
- the Loan to Value of the mortgage must be 91-95%
- The mortgage should begin between April 2021 and Dec 2022
- Only Repayment Mortgages can be offered, not Interest-only
- All applicants must be subjected 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?
As the guarantee is based on responsible lending, you will still need to meet the lender’s acceptance criteria for a standard residential mortgage. This usually includes affordability and credit score checks, with lenders expecting a higher credit score in order to offer lending of 91 – 95% Loan to Value.
How do I improve my credit rating?
Prior to any mortgage application, it’s important to check your credit score with a credit reference agency. If you need to improve your score, you should check that all information held about you is correct and that you are on the electoral roll. Close old accounts and ensure incorrect information is rectified. You should also reduce any debts and hold of on applying for further credit.
What other fees will I need to pay?
You would usually be expected to pay Stamp Duty on UK property sales of over £300,000. The Stamp Duty tax suspension on properties up to the value of £500,000 has been increased until the end of June 2021.
There are a range of fees involved with a house purchase, which Mortgage Brokers can help you plan for. These include solicitors fees, mortgage arrangement fees and the cost of searches and surveys for your new property.
How can First Thought Financial help?
At First Thought Financial, we are regularly updated with new mortgage deals by our wide range of lenders. We can help you to access those offering high Loan to Value mortgages under the new Mortgage Guarantee Scheme.
As well as helping you with the administrative aspect of your application, we aim to make sure you approach those lenders with the most suitable deals for you.
THINK CAREFULLY BEFORE SECURING YOUR DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.