Mortgage Guarantee Scheme: What you need to know about the new 5% deposit mortgages
On 19th April 2021, the Government launched a new mortgage guarantee scheme designed to increase the number of buyers who have only saved a small deposit or have limited equity in an existing property. The good news is that several major lenders have joined the mortgage guarantee scheme which will provide 95% mortgages, the bad news – they are not special mortgages nor are they cheap.
The scheme, similar to the government’s 5% Help to Buy Scheme, which operated between 2013 to 2017, addressed the paucity of 95% mortgages since the onset of the coronavirus pandemic. Hoping it will encourage more lenders to re-enter the 95% market, under the new scheme, provided certain criteria is met and purchasers have a 5% deposit, home movers, first-time buyers, and previous homeowners will have access to 95% loan-to-value mortgages which operates in the same way as a standard mortgage offered outside of the scheme.
The incentive for mortgage lenders to offer 95% loans is that under the mortgage guarantee scheme, the government will shoulder some of the cost if the lender loses money. They could lose money if the borrower cannot meet their monthly mortgage repayments, resulting in the property being repossessed; but a subsequent sale does not recoup enough funds to satisfy the outstanding mortgage.
Who Can Take Advantage Of The Scheme?
Although the scheme is not restricted to first-time buyers and can be used by anyone purchasing a main home, there are certain eligibility criteria:
- The property must be in the UK and be the buyer’s main residential home. This means that the scheme cannot be used for buy-to-let property or second homes.
- The property must be worth £600,000 or less – the scheme will not apply to any property over this sum.
- At the time of writing, the property cannot be a new-build. Participating lending institutions are not allowing any newly built properties (specific conditions vary between lenders) because lenders generally have concerns that new-builds struggle to retain their value. This obviously becomes problematic for the lender if the property is repossessed in the future.
- The deposit must be between 5% and 9% of the property’s purchase price.
- The scheme only applies to repayment mortgages. This means that other types of mortgage, such as interest-only, are ineligible for the scheme.
- The purchaser will still need to fulfil the lender’s mortgage affordability criteria and credit checks.
Several of the UK’s biggest lenders are taking part in the scheme, Lloyds, NatWest, Bank of Scotland, Halifax, Barclays, Santander, and HSBC with others such as Virgin Money expected to follow soon.
Pros And Cons
- These types of mortgages are very expensive, the larger the deposit, the cheaper it will be.
- The rates on 95% mortgages are around 4%, which by comparison, if you have a 10% deposit, the mortgage rate is around 2.99%.
- Mortgages generally become cheaper at 60%, 75%, 80% or 90%
- Applies to all purchasers not just first-time buyers
- Makes getting on the housing ladder seem more achievable
How To Apply
The process is the same as applying for a standard mortgage, with many of the deals available direct from the mortgage provider or via a broker. The advantage of using a mortgage broker is that they are in a position to point out what deals could be found elsewhere and whether a particular mortgage is appropriate for the particular borrower.
Critics are concerned that the scheme does not go far enough to fix the broken housing market. James Forrester, Managing Director of Barrows and Forrester, said: “The inadequate supply of housing to meet demand is one of the driving factors that has caused house prices to spiral and to continue to mask this failure by further fuelling demand is irresponsible.”
CEO of reallymoving, Rob Houghton pointed out that high loan to value mortgages can be risky, adding: “for those who have been saving a deposit for many years this will be welcome news, enabling them to make the first step onto the property ladder, but we would urge people to proceed with caution, consider the risks carefully and think long-term about their property choices.”
For first-time buyers, there are alternatives to the expensive 95% mortgage scheme which are worth considering. The help to buy equity loan scheme in England, for example, allows borrowing up to 20% of the value of the property interest free for the first five years providing the purchaser has a 5% deposit. However, the way the equity loan scheme operates is extremely complicated.
Help to Buy Equity Loan Scheme In England
- As stated above, the scheme is for first-time buyers only.
- The maximum property price depends upon where you are buying. Regional price caps restrict how much the property can cost and the difference between the two ends of the scale is substantial, for example, London is at the top and is set at £600,000, whereas at the other end (North East), the price cap is set at a paltry £186,100.
- The property must be a new-build. This is in direct contrast with the 95% mortgage guarantee scheme, which more or less prohibits the purchase of new-build properties. A new-build is considered such if it has never been lived in.
- The purchaser must have at least a 5% deposit of the property price. With the equity loan, 20% of the purchase price borrowed under the Equity Loan scheme (40% in London). The equity loan is essentially “topping up” the deposit, aiming to give a purchaser at least 25% deposit.
- The purchaser obtains a mortgage for the amount not covered by the deposit or equity loan. This means that a purchaser is still subject to the vagaries of the lending institution, such as eligibility criteria, affordability, and credit checks. The upside is that, if accepted, the mortgage deal is likely to be cheaper (than the mortgage guarantee scheme) because not only will the amount borrowed be smaller, but the interest charged on the outstanding sum will be lower too.
It is worth mentioning that even if the mortgage taken out is smaller because an equity loan has been used, a purchaser might still not get access to the lender’s most competitive rates because some charge a premium for mortgages where an equity loan is being used.
- Equity loans are interest free for the first five years. Whilst you won’t pay any interest for the first five years, you still have to pay a £1 monthly management fee from the day the loan is granted until the day of the final payment. The good news is that if the loan is paid back within the first five years, not a penny interest will have been paid upon it.
- After five years have elapsed, interest will become payable until it is paid back in full. The initial rate in year six is 1.75% but increases every April in correlation with the Consumer Prices Index (CPI) measure of inflation plus 2% until the loan is paid off.
- If property prices rise, then more will be owed when paying the loan back (plus interest from year six). This is because when a loan is taken out, the government becomes a stakeholder in the property. If the loan equates to 20%, then the government will own 20% of the property until the loan is repaid. That percentage remains the same regardless of the property’s value, so it goes without saying if the value rises or falls, the government’s share will rise or fall too, hand in glove with the owner’s share.
- It could potentially be harder to “trade-up” if property prices rise. This is because, if after five years, a buyer wishes to purchase a more expensive property, if property prices jump in value, it may make the gap between the equity owned and the value of the new property even greater.
- Although equity loans can work out cheaper in the short-term, they come with a hefty price tag in the longer-term.
- You don’t have to repay the loan until the property is sold, although it can be paid back at any time.
Lifetime Isas (Lisas)
This scheme gives anyone aged 18-39 the chance to save a tax-free amount and get a bonus towards their first home. £4,000 per tax year can be saved, and the government will add 25% on top.
Help to Buy Isa
This is a tax-free savings account where for every £200 saved, the government adds an additional £50. However, there is a maximum limit of £3,000 which is paid to the conveyancing solicitor. These accounts are now closed to new applicants, but those who took one out have until November 2029 to use it.
Co-owning with a housing association means a property can be purchased on a partially owned basis, paying mortgage on your part and rent to the housing association on the share owned by them. Equity ranges between 25% to 75% of the property, but ownership is restricted to specific properties and can be problematic to sell on.
Our conveyancing teams are specialists in dealing with all manner of mortgage lending types. Contact us today to find out how we can help with the legal aspects of your next property move.