95% Mortgages Make a Return

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What is the new mortgage guarantee scheme?

The Mortgage Guarantee Scheme was introduced by the government to enable lenders to reintroduce lower deposit mortgages. Throughout the pandemic, most lenders took away their 95% mortgages. 

The government’s intention is that the scheme provided First Time Buyers, in particular, the ability to get onto the property ladder. Over the past year not having enough deposit has been the biggest barrier to First Time Buyers.

What is the difference between the Help to Buy scheme and the Mortgage Guarantee scheme?

The Help to Buy scheme is only available on new build properties. It offers an equity loan so you can buy a new build home for as little as a 5% deposit. The government lends you up to 20% towards your deposit for homes in the rest of England and Wales and up to 40% towards your deposit in London. 

The mortgage guarantee scheme doesn’t come with any deposit assistance from the government. It’s available for both First Time Buyers and Home Movers on properties up to £600,000. The guarantee gives lenders the confidence to offer 95% mortgages, on any house, it does not have to be a new build.

What is a 95% mortgage?

A 95% mortgage is basically a 5% deposit mortgage. The 95% refers to the Loan to Value, which is the proportion of your borrowing against the value of the property. The lender will be lending 95% of the value of that property.

Who is eligible to apply for a mortgage under the Mortgage Guarantee Scheme?

The scheme is not specific to First Time Buyers and is available to any creditworthy application that can meet the criteria set out by the lender that they choose. The property must also be their own residential home, not a second home or Buy to Let property. 

It could potentially be very useful for people that previously bought property on the Shared Ownership Scheme because they don’t have as much equity as those who own their home outright.

Which lenders will be offering mortgages under the scheme?

A few lenders initially mentioned that they would take part, such as Lloyds, Santander, HSBC, the main high street banks. There are actually lenders offering 5% deposit mortgages outside of the scheme too, such as Coventry Building Society, Accord, Skipton Building Society, Bank of Ireland. This means that the majority of lenders are likely to follow suit soon in order to compete.

What rates will be available on 95% mortgages?

This information is not currently available for the lenders using the guarantee scheme, but those offering 95% mortgages outside of the scheme are at around 3% and generally, they’re on longer term fixed rates of about five years. This may or may not influence other lender’s rates going forward, but the more lenders offering 95% mortgages will also drive competition.

Can you get a 95% mortgage on a new build home? 

No, it’s not possible on a new build, however, the Help to Buy scheme solves that problem. As that increases your deposit to a minimum of 25%, of which the buyer only needs to offer 5% and this is only available on new build properties.

Can I take advantage of the Mortgage Guarantee Scheme and the Stamp Duty holiday at the same time?

This is perfectly possible as long as you complete before the 30th of June 2021. If you’re a First Time Buyer and the property is below £300,000 then you won’t pay stamp duty anyway.

After 30th June, there will be some element of Stamp Duty relief in place until the end of September. It also depends on each individual client’s circumstances and what they’re actually buying as to how much of an impact that Stamp Duty holiday has for them.

What are the risks involved with the 95% mortgages? 

It’s difficult to estimate this as house prices are driven by supply and demand. The demand doesn’t look set to reduce any time soon, so it’s possible that over the long term house prices will probably continue to rise. There is the potential that if house prices go down the buyer could go into negative equity, which is probably the main risk.

If you’re in negative equity there’s less chance that you would be able to move if you wanted to, because you wouldn’t have any equity in the property. If you sold the property for less than you bought it, you would be required to make up the shortfall and would have no equity to use as a deposit on the next property.

Another risk is if the interest rate increases in the future and you have quite a high level of borrowing, you would need to be sure that you‘re able to afford the higher monthly mortgage payments.

Should I save for a higher deposit?

The main disadvantage with 95% mortgages is the cost, as the interest rates are quite high when you compare them to some of the lower Loan to Value mortgage products.

It’s always a balancing act of getting on the property ladder as soon as possible versus saving up a bigger deposit. 

Generally, when you’ve got a bigger deposit, the interest rate goes down in line with lower risk to the lender. Currently, however, there is not a great deal of difference between the rates 90% and 95% borrowing.

How much can I borrow with a 95% mortgage?

This depends on the independent lenders’ criteria and affordability rules. Almost every lender currently offering a 95% mortgage is restricting the loan to about 4.9 times the annual income of borrowers. This doesn’t necessarily mean that other lenders won’t be able to offer more, but most will want to reduce the risk as much as they can.

What are the alternatives to the Mortgage Guarantee Scheme?

Shared Ownership is where you part by and part rent and it’s perfect for people that have got a lower deposit and/or income, especially people that are buying on their own.

Family Assist mortgages are offered by Halifax and Barclays as well as a few other lenders. With this option, the buyer doesn’t have to put any deposit down and a family member or similar helper opens up a savings account and puts 10% of the purchase price into that account.

It gets locked in there for five years and they earn interest on it. They can then take that money back out at the end of five years, so long as the mortgage applicant has kept up with payments.

Should I be preparing anything now to apply for a 95% mortgage?

If you’re planning to take advantage of the Mortgage Guarantee Scheme, the best thing to do is to get in touch with us for a strategy call. 

We can work out your affordability and due to the business of the market, you’re likely to require an Agreement in Principle, which we can arrange for you. It’s a very good idea to have that all prepared before you look to place an offer on a property. 

The key to taking advantage of the Stamp Duty holiday is to be prepared and increase the chance of completing within the time frame given.

To get in touch with the Momentum Mortgages team, navigate to that contact page and either call or book a strategy call online.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE 

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