In 2020, 5% home deposits became almost unheard of – and 10% deposit options were scarce. This meant many people would have to try and muster up a 15% deposit to buy a home.
The government have announced an impending scheme to enable banks to bring back high loan-to-value (LTV) mortgages – meaning you may be able to own a home with a 5% deposit again. This scheme will help people to access mortgages on new builds and older homes.
What is the new mortgage guarantee scheme?
The new mortgage guarantee scheme is a support scheme that’s been put in place by the government to help the property market.
It’s designed to encourage mortgage lenders to give high loan-to-value mortgages to customers who have a good credit history. This gives buyers with a 5% deposit the opportunity to get a 95% mortgage.
The government is offering lenders the option to buy a ‘government guarantee’ on the amount over 80%, so in the case of a 95% LTV mortgage, the government would guarantee the extra 15%.
This guarantee compensates the mortgage lender for any losses that might occur if their customer’s unable to meet the mortgage repayments.
The scheme hopes to:
- Help borrowers
- be simple for the customer
- be administratively straightforward
- not incentivise irresponsible lending
- minimise the level of financial risk for lenders
- be put in place rapidly and effectively
Who is eligible?
The scheme is open to UK residents. It’s available to first-time buyers as well as people who are wanting to move homes. It’s not restricted to new-build homes but there is a £600,000 limit.
To be considered for the scheme you’ll need to undergo a credit score assessment. You’ll also need to apply for a repayment mortgage rather than an interest-only mortgage. The amount you’re borrowing will need to be between 91% and 95% of the overall price of the property you intend to buy.
The scheme is not available to those looking to buy a second home or looking for a buy to let option.
When will the scheme be available?
There’s no confirmed date for when the scheme will launch but the government have confirmed it’ll be sometime in April 2021. The closing date is currently set as 31st December 2022 but there’ll be a review of the scheme before then. This give’s people who are interested at least 20 months to apply.
Can I buy with a 5% deposit?
For those with a 5% deposit, they’ll be able to apply to participating lenders for a 95% loan-to-value (LTV) mortgage deal.
Mortgage rates are likely to be competitive since a lot of mortgage lenders have already made a commitment to the scheme. The participating lenders that have been announced so far include Barclays, HSBC, Lloyds, NatWest, Santander and Virgin Money. However, it’s likely that more banks and building societies will consider offering mortgages through the scheme later down the line.
The government acts as a guarantor for the homeowner. This means if the homeowner can’t keep up the mortgage repayments, the government will cover the costs. However, this is only beneficial to the mortgage lender. It protects their finances if the property were to get repossessed, but it doesn’t benefit the homeowner in any way. If the homeowner falls behind on their mortgage repayments, they could end up losing their home and it would result in them having bad credit.
How to apply
It’s likely that you’ll be expected to apply for the government guarantee scheme directly through whichever mortgage lender you choose to go with. However, information on how to apply has not yet been released and is likely to be released at some point in April.
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