Is The Mortgage Guarantee Scheme Your Way Onto The Property Ladder?

For millions of Brits, getting onto or moving up the property ladder is a total pipe dream. For many, it’s not making the monthly repayments or even their credit history that’s holding them back, it’s having to amass such an enormous amount of money to put down as a deposit. That’s where the mortgage guarantee scheme aims to help.

This government backed scheme acknowledges that big deposits are one of the main barriers to homeownership and has set about trying to fix this by encouraging lenders to offer mortgages that represent a bigger portion of a house’s value – meaning smaller deposits from us. But how? Keep reading; we’ve got the lowdown.

What is the mortgage guarantee scheme?

The idea of the mortgage guarantee scheme is to make it possible for more people to buy their first or next home. With mortgage products included in the mortgage guarantee scheme, you’ll only need a 5% deposit, although you can have more as long as it’s less than 10% of the value of the home you hope to buy. The government then offers lenders a guarantee that promises to compensate them for some of the money they’d lose if you stopped paying your mortgage and your home was repossessed, which helps them feel comfortable offering the remaining 95% as a mortgage, to make up the total price of the property.

Who can get a mortgage under the mortgage guarantee scheme?

Mortgages that fall under the mortgage guarantee scheme are available to both first-time buyers and current or previous homeowners who have at least a 5% deposit. But, there are some other criteria you and your new home must meet to be eligible for a mortgage under this scheme:

• The home you hope to buy must be valued at no more than £600,000
• The property must not be classed as a new-build home
• The mortgage must be a residential mortgage, i.e. not for a second home or a buy-to-let property
• The mortgage must be a repayment mortgage and not an interest-only mortgage
• To take out a mortgage under this scheme, you must be applying as an individual or individuals, not as or on behalf of a business

It’s worth remembering though that even if you meet all of these criteria, your mortgage application will still be subject to credit and affordability checks by your chosen mortgage provider so that they can make sure you can afford the monthly repayments you’ll need to make, and are likely to keep up with them. The mortgage guarantee scheme is not a guarantee that your application will be approved.

How does the mortgage guarantee scheme work?

As a customer looking for a mortgage, you probably won’t notice any difference between getting a normal mortgage and getting a mortgage that’s supported by the government mortgage guarantee scheme. The process that you’ll go through to find a deal you like the look of and then apply for it – including all the checks that will be carried out as part of the application – is the same. The only difference is that some banks may not let you apply for a mortgage under the mortgage guarantee scheme completely online. You might need to go to one or more appointments with one of their mortgage advisers at your local branch before you can submit your application.

The guarantee part of the scheme is something that happens between the mortgage provider you’ve chosen, and the government. When you apply for a mortgage that’s backed by the government scheme, the lender will purchase a guarantee from the government. This guarantee promises to compensate the lender for a portion of their losses in the event that you stopped paying your mortgage and your home had to be repossessed. The guarantee is then valid for seven years, the thinking being that if you manage to keep up with your payments for that long, you’re extremely unlikely to stop paying and default on your agreement later.

How long will the mortgage guarantee scheme last?

The mortgage guarantee scheme will be open for new mortgage applications until December 2022, although of course, the end date will be reviewed nearer the time. It’s intended to be a temporary scheme, introduced as a response to the relative lack of mortgages available that offer a high loan-to-value to give lenders the security they need to offer such large loans.

That the scheme is intended to be temporary doesn’t mean that once it ends, high loan-to-value mortgages like the 95% mortgages available under this scheme will completely disappear. But, after the end of the scheme, lenders will no longer be able to purchase the guarantee that helps them get comfortable with the risk that comes with such high loan-to-value mortgages. So, you may find that there are less of them to choose from, or they come with higher interest rates.

Whichever way you slice it, if a 95% mortgage is the only way you’re going to be able to buy your first or next home, then doing so while you can take advantage of the mortgage guarantee scheme to maximise the different options on the table would be a wise move.

Why do lenders need the guarantee to offer 95% mortgages?

When you borrow money – any money – the lender is taking a risk that you won’t pay them back. When it comes to mortgages, asking for a relatively large deposit is one of the ways that mortgage providers manage that risk, and that’s why 95% loan-to-value mortgages are not all that common a thing. You come across them occasionally, sure, but usually you’ll need to put up a 10% or 15% deposit – at least – when buying a property.

The government guarantee is an option that lenders can purchase to help them mitigate the risk they take when offering high loan-to-value mortgages. Under the guarantee scheme, the government will compensate them for a portion of their losses in the event that you stop making your mortgage payments and your home is repossessed.

Which banks are offering 95% mortgages?

At the time of writing, Lloyds, Santander, Barclays, HSBC, Natwest and Virgin Money are the leading high-street banks offering mortgages under the mortgage guarantee scheme. Other mortgages under the scheme may be offered by other lenders as time goes on. If more options become available, we’ll be sure to update this article so that you know.