5% Deposit – The Mortgage Guarantee Scheme 

In March 2021 the government announced a new mortgage scheme to help keep the property market moving. Under the Mortgage Guarantee Scheme lenders are bringing back 5% deposit mortgage deals – could this help you get on the property ladder?

What is the Mortgage Guarantee Scheme?

The purpose of the Mortgage Guarantee Scheme is to support First Time Buyers. 

It’s a response to the big reduction in 95% loan-to-value mortgages offered by lenders. The pandemic led banks and building societies to become more cautious about offering loans with small deposits. 

But raising the deposit requirement means that many buyers are unable to access a mortgage. The average house price is now £230,000, meaning that a 10% deposit will cost £23,000, which is beyond the reach of many. 

The new scheme is a financial promise from the government to reimburse mortgage lenders for any losses they suffer from offering 95% mortgages to consumers. It replicates a similar guarantee introduced in 2013 following the financial crisis, which successfully boosted the housing market.

How does the Mortgage Guarantee Scheme work?

For customers it means there will be more 95% loan-to-value mortgages on the market. A benefit of the scheme is lenders have to offer customers five-year fixed rate mortgages. 

Fixed rate mortgages are popular with buyers because monthly payments stay level – they don’t go up or down with the base interest rate. Knowing how much your payment is each month makes it easier to manage your money.

The first lenders to launch new mortgage products under the scheme are Lloyds, NatWest, Santander, Barclays, HSBC and Virgin Money. The 95% LTV mortgages will be open to applications from early April 2021 until 31 December 2022.

What are the rules of the scheme?

The mortgages only apply to residential properties (not Buy to Let), and are for individuals rather than companies. The mortgages must be capital repayment products – there are no interest-only deals. 

The mortgages are available on properties with a purchase price up to £600,000 at 91% to 95% loan-to-value – which means you need a 5% to 9% deposit.  

Do I need good credit for a Guaranteed Mortgage?

Your credit score is an important part of the approval process, and a lender will have certain criteria that you will need to meet. This helps reassure the lender that you will repay the loan on time. 

Your credit history doesn’t have to be perfect, though, and each lender will have their own requirements. You could find that older, small scale debts will not affect your application.  

More serious credit issues could make things more tricky, however.  If you are concerned, talk to a Mortgage Broker like OB1 – we can give you tailored advice based on your specific situation.

How much could I borrow with a Guaranteed Mortgage?

The amount you can borrow will depend on your income and deposit. Many lenders will offer around four times your income. 

A mortgage calculator is useful in giving you an idea of how much could borrow on a 95% mortgage, and what the monthly mortgage repayments might be. Remember that high loan-to-value mortgages will have more expensive repayments. 

What other fees will I need to pay?

Buying a home involves solicitors, searches and surveys, all of which will cost you money. You will usually need insurance too, particularly life insurance and buildings cover. 

You might also worry about stamp duty – but First Time Buyers are exempt from paying this tax up to the value of £300,000. 

Covid-19 has also meant that stamp duty has reduced. It is currently due only on houses valued at £500,000 and over, but this will reduce to £250,000 at the end of June and return to £125,000 at the end of September 2021.

How can a Mortgage Broker help?

If you think the Mortgage Guarantee Scheme could be the support you need to buy a home, let us help you look at the details. 

We are here to make it easier to explore your option and buy a home. By getting to know you and your plans we can put you in touch with brokers who are able to find the most suitable 95% mortgages. It’s important to shop around as every lender will have different mortgage rates, fees, criteria and incentives. We’ll do all the hard work for you and explain all the pros and cons of a high loan to value mortgage and help you through the application.

OB1 Financial Group Ltd is an Appointed Representative of Woodley Limited. Woodley Limited are authorised and regulated by the Financial Conduct Authority and registered in England. For more information contact our registered office today! 

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