What is the Mortgage Guarantee Scheme?
The Mortgage Guarantee Scheme was introduced by the government as a way to incentivise lenders to return to offering 95% loan-to-value (LTV) mortgage products. Up until that point, the number of high LTV mortgage deals had fallen dramatically as lenders looked to reduce their risk exposure following the financial crisis and moving into the Covid-19 pandemic. Indeed, in February 2021, there were only 3 deals available at 95% LTV, with the majority of lenders capping the maximum ratio at 90% LTV.
The government's aim was to help buyers secure property purchases with a lower level of deposit, with many priced out of the market if they had to put down 10% deposit or more. Chancellor Rishi Sunak announced the scheme in the 2021 Budget and it was introduced on 19 April 2021, with six lenders participating in it. It has, however, also sparked a range of other lenders to launch their own 95% LTV deals outside of the scheme.
How does the Mortgage Guarantee Scheme work?
The key issue lenders had with 95% LTV mortgages was the risk inherent in having such a large mortgage in relation to the price of the property. When the wider economy is unstable, there is a greater likelihood of borrowers defaulting on their mortgage repayments, resulting in a burden for the lender in chasing payments and, ultimately, a higher chance of losing money if the property has to be repossessed.
The Mortgage Guarantee Scheme acts to reduce that risk, with the government covering a proportion of any potential losses. In effect, it results in the same level of risk for the lender as an 80% LTV product, with the government covering the other 15%.
As part of the scheme, lenders have to offer a 5-year fixed-rate deal as part of their 95% LTV range, with the government stating this provides borrowers with greater security and predictability. The maximum loan size backed by the scheme is for properties up to £600,000.
In practice, it makes no difference to the end consumer if the lender is participating in the mortgage guarantee scheme or not. The products are listed alongside 95% LTV deals from other lenders, with no discernible difference in how they work or the terms and conditions associated with them.
Who will the Mortgage Guarantee Scheme help?
The scheme is designed to help:
- First-time buyers and existing homeowners: Unlike other schemes that only target people buying their first homes, the mortgage guarantee scheme is also designed for movers who have little equity in their existing property
- People buying property up to the value of £600,000
- Those taking out a residential repayment mortgage: The scheme does not extend to buy-to-let mortgages
- People borrowing up to 4.5 times their earnings
Outside of these points, the lenders have the right to impose their own eligibility criteria on applicants, including, for example, whether they are willing to lend to the self-employed or on new-build properties.
Which lenders are offering 95% LTV mortgages?
Six lenders signed up for the launch of the mortgage guarantee scheme: Barclays, HSBC, Lloyds Bank, NatWest, Santander and Virgin Money. However, leading up to the launch date, a range of other lenders came to market with 95% LTV mortgages, including TSB, Bank of Ireland, Aldermore, Danske Bank, Skipton, Coventry and Yorkshire Building Society (through subsidiary Accord Mortgages).
Since then a raft of other lenders also launched their own low-deposit deals, with more set to follow. To find the best 95% deal for your circumstances, it is worth using a good whole-of-market mortgage broker, such as Habito*, as they will be able to give you an overview of what is available, including exclusive deals that can only be accessed by intermediaries.
For details of the best and cheapest 95% LTV mortgage deals, read our overview.
What are the advantages of 95% LTV mortgages?
- Only having to secure a 5% deposit makes it easier to buy a house sooner than if you had to save up 10% or more
- It makes it possible for people with only a limited amount of equity in their current home to move house or refinance. This may be because the value of your home has dropped or if you want to move to a more expensive property.
What are the disadvantages of 95% LTV mortgages?
- The interest rates on higher LTV mortgages are generally significantly higher, which makes them more expensive. However, you should be able to refinance to a cheaper lower LTV deal in the future, as long as your house has gone up in value.
- You may have to pay a higher lending charge, which could be as much as 8% of the value of the loan. However, not all lenders make this charge, so it is worth checking in advance.
- You could fall into negative equity - where the mortgage debt is more than the value of your property - if house prices fall after purchase. This is a particular risk for new build properties and the reason some lenders refuse to lend on them at high ratios.
What are the alternatives to the Mortgage Guarantee Scheme?
The government's Shared Ownership scheme allows people to buy a proportion of their home, paying rent on the remaining share. As part of the scheme, homebuyers only have to pay between 5-10% deposit.
For full details, read our article "What is Shared Ownership - and should I do it?"
Help to Buy Equity Loan
If you are a first-time buyer struggling to save the money needed for a deposit, the government can provide a loan worth 20% of the property's market value (40% in London) to facilitate buying a property with as little as 5% deposit.
There is a detailed explanation of the scheme in our article "What you need to know about the Help to Buy Equity Loan".
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