5% Deposit - The Mortgage Guarantee Scheme

In the March 2021 Budget, Chancellor Rishi Sunak announced a new initiative to help people in the UK get on the property ladder. Called the Mortgage Guarantee Scheme, it’s designed to bring 95% mortgage deals back to the market.

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What is the Mortgage Guarantee Scheme?

The Mortgage Guarantee Scheme is a response to a big decrease in lenders offering 95% loan-to-value mortgages. This was making it more difficult for people to get on the property ladder as, for many, a 5% deposit is the maximum they can comfortably save.

The new scheme provides mortgage lenders with government support to reintroduce 95% mortgages. If a customer were to default on their mortgage, the government has promised to absorb some of the lender’s loss.

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What does the Mortgage Guarantee Scheme involve?

A similar initiative launched in 2013 after the financial crisis and was successful in reinvigorating the property market, especially for First Time Buyers. It brings with it some important benefits.

First, lenders in the scheme must offer customers a five-year fixed rate mortgage deal. Fixed deals provide better security, as mortgage repayments stay the same every month rather than changing with Bank of England interest rates. Second, it applies to repayment only mortgages, not interest-only deals. Interest-only can be a riskier way to borrow.

Lloyds, NatWest, Santander, Barclays, HSBC and Virgin Money were the first brands to announce they would offer mortgages under the new scheme. These mortgages will apply from April 2021 to 31 December 2022.

Are there any restrictions under the scheme?

The scheme applies to residential repayment mortgages (not Buy to Let or second homes), and must be taken out by an individual rather than a company. The maximum purchase price is £600,000, and the mortgage needs a 91% to 95% loan to value – so you will need a 5% to 9% deposit.

How much could I borrow with a Guaranteed Mortgage?

The amount that a lender offers you depends on your income and the size of your deposit. Put these details into a mortgage calculator for an idea of how much you could borrow – although the final amount could vary by lender.

Make sure the monthly mortgage repayments are affordable. If you fall behind with repayments your home may be repossessed.

Mortgage products vary, so it’s important to compare various different options. Look at both mortgage rates and arrangement fees to narrow down the options.

Do I need a good credit score for a 5% Deposit Guaranteed Mortgage?

Lenders will always look at your credit record as part of their approval process. When you’re putting down a small deposit, they will want extra reassurance that you will repay the loan. Each lender will have different criteria, however, so you might find that a small or old debt on your record isn’t a problem.

What other fees will I need to pay?

The good news for First Time Buyers is that they don’t need to pay stamp duty, which is a form of property tax. If you own a home and are moving to another one, stamp duty will apply. At the moment, in response to the pandemic, the duty only applies to homes worth £500,000 and over until the end of July 2021.

You will definitely need to budget for solicitors, searches and surveys and you will also need buildings cover as part of your mortgage contract. Other protection products are worth exploring too, such as income protection cover, life assurance, critical illness cover or contents insurance.

How can a Mortgage Broker help?

Are you thinking the Mortgage Guarantee scheme will help you afford a home? If so, we can help you explore all the options.

We’ll spend time getting to know you, your financial situation and the kind of house prices you’re aiming for, so that we can look for the most suitable 95% mortgages. We’ll look at the different rates, fees and lending criteria and make sure you understand the opportunities and risks of a high loan-to-value mortgage.

We can also help you explore other government Help to Buy initiatives and demystify the homebuying process. We do all the hard work for you, recommending the most suitable mortgage options to help you buy a home. We’re authorised and regulated by the Financial Conduct Authority, and our advisors will always go the extra mile to help you achieve your property plans.

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