This week's Budget was hotly anticipated, with so much speculation about announcements around Stamp Duty.
There was also confirmation about a new government mortgage guarantee scheme, which will open up the market to thousands of existing homeowners and first-time buyers who have found themselves locked out of mortgage eligibility.
Let's explain how this new 95% mortgage works, who can apply, and why it might make a substantial difference for tens of thousands of people.
What is a 95% Mortgage Guarantee?
This announcement isn't about a new mortgage product or a new lender. Instead, it is a governmental guarantee that will make it easier for lenders to approve applicants they may have otherwise turned down.
The other meaningful impact is that many mortgage applicants cannot find competitive rates or affordable repayment options without a sizable deposit.
Many barriers to mortgage borrowing can be overcome by working with an independent broker. Still, we welcome this new guarantee programme and recognise that it may prove invaluable in helping prospective buyers move ahead with their transactions.
Here's why a 95% guarantee will help:
- The guarantee acts as a robust form of security, lessening the burden on mortgage applicants to provide other security, a larger deposit, or a guarantor if they don't hit all of the eligibility requirements.
- Many lenders have restricted lending, withdrawn products or declined new customers to safeguard their risk profile due to the pandemic. This new guarantee will bolster lending confidence.
- One of the conditions of participation is that lenders must offer a fixed-term deal for a five-year product, potentially increasing the availability of affordable mortgage borrowing without monthly payment fluctuations.
- Borrowers will still need a minimum 5% deposit, but will have access to better terms, lower interest rates and less strenuous eligibility checks given the strength of the guarantee covering the vast majority of the lender's risk.
High Loan to Value borrowing has been scarce over the last few months. As we've mentioned, mortgage lenders have faced the same challenges as any other business and have been far more likely to consider applicants with a 10% plus deposit.
Being able to leverage a governmental guarantee removes almost all of the risk associated with a mortgage offer. It should, therefore, improve the appetite for high LTV lending across the sector.
How Does the Government Mortgage Guarantee Scheme Work?
The scheme itself is a guarantee rather than a mortgage product. Homebuyers will still need to apply for mortgage lending from a participating bank, but applications will be far more attractive from a lending perspective with the guarantee in place.
It works as follows:
- Buyers will need to save up their 5% deposit (or collect it from an acceptable source) and then go through the regular affordability checks. An agreement in principle is still advisable since it illustrates your likely borrowing budget before you begin a property search.
- Participating lenders will be able to put in place a guarantee backed by the government for between 91% and 95% of the purchase price. Therefore, deposits will be included from the 5% minimum and up to 9%.
- The guarantee will cover compensation for any lost lending, as well as some of the associated costs, should the property end up in a repossession scenario. Regular checks apply, so this won't increase the likelihood of repossessions and discourage lenders from irresponsible lending.
- Residential mortgages covered by the guarantee scheme remain FCA regulated.
- Guarantees are enforceable within seven years of the mortgage start date.
- Eligible properties cannot cost more than £600,000, and the offered mortgage must be on a repayment basis and not interest-only.
While Help to Buy equity loans remain available, the government discontinued the previous Help to Buy Guarantee programme four years ago.
Reintroducing a government guarantee will help both first-time buyers and house movers achieve their property aspirations and reduce the prevalence of high cost, high-interest mortgages.
Can I Apply for the 95% Government Mortgage Guarantee?
Guarantees will be available from April 2021 until December 2022 - so from next month, you have about a year and a half to apply for the guarantee scheme.
Applicants must be:
- Buying a UK property valued at £600,000 or less, either as a first-time buyer or a home mover.
- Purchasing a primary residential home (guarantees are not available on commercial mortgages or buy to let investments).
- Able to put down a deposit of between 5% and 9%.
- Eligible under the usual credit scoring and checks offered by the lender.
- Taking out a repayment mortgage, not interest-only.
If you are unsure whether you are eligible for a mortgage guarantee, or would like help finding the most competitive mortgages deals participating in the scheme, give the Revolution Brokers team a call.
Can I Use the Mortgage Guarantee Scheme and Help to Buy?
With existing schemes such as Help to Buy, there are several options if you're looking to buy a property and need help securing a mortgage.
It doesn't look like the 95% mortgage guarantee will be compatible with these schemes because:
- Help to Buy equity loans offer an interest-free loan for up to five years to 20% of the property value. The loan is used to bump up a personal deposit from 5% to 25% - and therefore, a Help to Buy mortgage wouldn't be eligible for the guarantee since the deposit level must be between 5% and 9%.
Help to Buy is only available to first-time buyers purchasing a new-build home. These purchases would be eligible for the guarantee scheme (were the buyer not using Help to Buy), but the 95% guarantee is open to any applicant buying any property beneath the cap.
However, you could potentially use a Lifetime ISA to help save up the required 5% deposit value. These individual savings accounts provide a 25% top-up from the government against the deposits you make.
Contributions are capped at £4,000 per year, so you can claim up to £1,000 per annum to improve your deposit balance.
For more information about the mortgage guarantee scheme, or other assistance programmes, contact the Revolution Brokers team on 0330 304 3040, or drop us a message to arrange a good time to talk.
Contact us now to discuss your personal options, Revolution Finance Brokers specialise in commercial and residential finance in Essex, Kent, London and Hertfordshire.