The recent budget saw the implementation of the Mortgage Guarantee Scheme. When the Covid-19 pandemic began to spread in Spring 2020, property valuations went the other way, slowing rapidly. This led to low-deposit mortgages being withdrawn as lenders searched for a safety net. Over the following year this market has, gradually, righted itself, particularly on the back of the Government’s support packages for the housing sector. The availability of low deposit, 95% mortgages went back up, if slowly.
So how does the new Mortgage Guarantee Scheme work? Read on.
What is the Mortgage Guarantee Scheme?
As of April 19, 2021, the UK Government has implemented the Mortgage Guarantee Scheme (MGS), which looks to help home buyers move forward with as little as a 5% deposit available.
This works through the Government providing lenders with a guarantee on those mortgages, so that in the case of a borrower defaulting within the first seven years, the lender will not be responsible for 100% of the loss.
This blanket of safety encourages lenders to work with more low-deposit borrowers, increasing market competition and, in theory, stabilising property prices.
The MGS is meant as a temporary measure, with Ministers of the opinion that the withdrawal of these loans by lenders is a response to Covid uncertainty rather than a long-term issue with the mortgage type. New applications for 95% loans under the scheme will be open until December 2022.
Am I eligible for a 95% mortgage?
Every lender must carry out full affordability assessments for these loans, as they are required to do for normal mortgages, which factors in living expenses, household incomes and more. Assuming you meet the lender’s requirements, the MGS comes with mandatory criteria:
- The loan under the Mortgage Guarantee Scheme must be taken on a repayment basis
- The loan under the Mortgage Guarantee Scheme is only available to first-time buyers, or those moving from their primary residence into a new primary residence. It is not available in other circumstances, such as second homes or investment properties.
- The loan under the Mortgage Guarantee Scheme is valid for borrowings up to £600,000.
What property can I buy with the Mortgage Guarantee Scheme?
Aside from the Government’s mandatory criteria outlined above, each lender may have subsequent limitations around the 95% loans, many of which would have been in place before the MGS was announced.
This may include restrictions on properties like new-build homes or small flats, where lenders will only allow the purchase of existing, certain-sized houses.
Does every 95% loan fall under the new Mortgage Guarantee Scheme?
No, not every new mortgage with 5% deposit will automatically come under the Government’s new scheme. This will come down to the choice of each lender, with several having signed up for the MGS, but others having launched their own initiatives.
Regardless, this has limited impact on your side, as you are still borrowing from the lender. Whether they share the risk with the Government as part of the scheme or not does not affect you.
The MGS is not the only Government plan to improve options for home buyers, having also announced initiatives like the Help to Buy Equity Loan, for first time buyers, which you can read about on the Think Plutus blog page here.
Should I buy property now, or is it better to keep saving my money for a bigger deposit?
The standard rule for home buyers is that the longer you can save, and the larger a deposit you have, the wider range of options you have available to you when it comes to selecting a mortgage.
Lenders favour those with bigger deposits, which makes sense; after all, they’re taking a risk on you defaulting, so the more they lend the higher the potential downside. So naturally, the more you put down for the property from your end, the more the lender is likely to make available for you, and the lower your rate is likely to be for payments.
Of course, all of this depends on your unique circumstance. How much you can borrow, and how big a loan you have, will influence which properties you’re looking for. Making use of schemes such as the new Mortgage Guarantee Scheme may make a lot of financial sense for some people in the long term.
This article is not intended as financial advice. Please seek advice from a qualified Financial Adviser.
HAVE QUESTIONS? THINK PLUTUS.