The Mortgage Guarantee Scheme was introduced in April 2021 to encourage those looking for a home with less than 10% deposit a range of extra mortgage options.
So, how does this Government initiative work? Who is eligible for it and what alternatives should you consider?
For this week’s Top Tip Tuesday, we will be providing a complete guide on the Mortgage Guarantee Scheme plus answering some questions you may have on the subject.
What is the Mortgage Guarantee Scheme?
The 2021 Mortgage Guarantee Scheme is an initiative created by the UK Government to encourage mortgage lenders to reintroduce 95% loan-to-value (LTV) mortgages to the market. These products, which allow people to get onto the property ladder with just 5% deposit, all but disappeared during the coronavirus pandemic.
The scheme has had the desired effect, with five of the UK’s leading mortgage lenders having launched new 95% mortgage products on the day it kicked off (19th April 2021). Other lenders have since launched their own 95% LTV mortgages outside of the scheme.
Although the scheme’s main goal is to increase the number of 5% deposit mortgages available, you can actually put down up to 9% deposit if you wish.
How does it work?
The government has incentivised 95% LTV lending by ‘guaranteeing’ a portion of any mortgage offered under it. This basically means that it will share some of the risk that the mortgage lender is taking on and will compensate them if the property has to be repossessed.
In terms of how it works for you, there is no extra paperwork to complete or anything like that. You will simply apply for your mortgage as normal, and your mortgage broker should tell you whether a guarantee scheme product is the best fit for your needs.
Bear in mind that there’s no real difference between guarantee scheme mortgages and any other standard 95% LTV mortgage product. By speaking to a mortgage broker before you apply, you can gain access to every 5% deposit mortgage on the market, which means your chances of landing a good deal will be higher than they would be if you limit yourself to the mortgage guarantee scheme.
When does the scheme run until?
The scheme will run until December 2022 initially. The government has pledged to review the initiative when it’s due to end and assess whether an extension is needed.
How to apply for the Mortgage Guarantee Scheme
If you think the mortgage guarantee scheme might be the right option for you, your first step should be to speak to a mortgage broker to make sure that this is a viable option. The 5% deposit mortgages available through the initiative aren’t the only ones on the market, so it is vital that you compare these products with every alternative to make sure you get the best deal.
A broker who specialises in low-deposit mortgages will compare every guarantee scheme product with the other 95% LTV mortgages on the market, as well as alternative government schemes, such as Help to Buy. They will match these products with your needs and circumstances to narrow down the list of suitable deals and help you choose the best option.
Once your broker has helped you choose the right 5% deposit mortgage for you, the application process from here is the same as it would be for any residential mortgage, whether you’re using the mortgage guarantee scheme or not.
Mortgage lenders will decide who qualifies for a mortgage under the guarantee scheme in line with their general eligibility criteria. This is basically an assessment of your credit worthiness based on factors including your credit history, your income, your outgoings, your age, and other factors. You can find out exactly what lenders look for when assessing a mortgage applicant by having a quick search online.
One thing to keep in mind is that a mortgage guarantee scheme lender might be more strict with their eligibility criteria due to the extra risk posed by your low deposit.
As well as meeting the lender’s eligibility criteria, the mortgage guarantee scheme itself has a set of requirements that the borrower must meet to qualify.
The restrictions you’ll encounter are…
- Reserved for customers with 5-9% deposit.
- Property must be valued at under £600,000.
- Property must be a primary residence, not a second home or a buy to let.
- Mortgage must be offered on a repayment basis, not interest only.
- Applicant must be an individual or individuals, not a company.
- Lenders are not offering guarantee scheme mortgages on new-build homes.
If any of these restrictions apply to you and are threatening to scupper your mortgage plans, keep in mind that the guarantee scheme isn’t the only way to get a 5% deposit mortgage.
If you speak to a broker who specialises in arranging low deposit deals, they can go through the alternatives options – some of which don’t have these limitations.
You’ll need at least 5% deposit to apply for a mortgage through the guarantee scheme, but it is possible to put down more than that. The lenders who are on board with the initiative have products in their range which go up to 91% LTV for those with 9% deposit.
Putting down more than 5% deposit might boost your chances of getting a favourable interest rate, but the source of your deposit could also affect the deals you qualify for.
Some lenders will only accept traditional deposit sources, such as personal savings, inheritance or the sale of another property, while others accept ‘non-standard’ sources.
Is the scheme open to first-time buyers?
Yes, absolutely. Given that many first-time buyers struggle to save up enough mortgage deposit, they are expected to be the group who benefit the most from the scheme.
That said, first-time buyers should keep in mind that the mortgage guarantee scheme is not their only option if they have just 5% deposit to put down. There are other government schemes and specialist products that might be a better alternative, and a mortgage broker who specialises in low-deposit customers can help you make the right choice.
IMPORTANT – Although the mortgage guarantee scheme is expected to be popular among first-time buyers, it’s not exclusively for them. Home-movers can apply through it, too.
What terms are available?
The mortgages available through the guarantee scheme generally come with the same term length as any other residential mortgage. A mortgage term of 25 years is considered average, but some lenders will allow you to stretch the debt over 30-35 years.
There are several fixed-rate mortgage products available in each mortgage guarantee scheme lender’s offering. The government reached an agreement with participating lenders to ensure that each of their product ranges includes at least one five-year fixed-rate deal.
At launch, the guarantee scheme range includes a mixture of products with between two and five-year fixes, which means you can lock yourself into a deal with a lower interest rate for between two and five years, after which you will switch to the lender’s standard variable rate (SVR) – which is usually more expensive – unless you remortgage at that time.
Tracker rate mortgages are also available, and they are often chosen by customers during times of low interest rates. The rates on these mortgages are determined by an external source, usually the Bank of England’s base rate, and can go up or down during the term.
Mortgage Guarantee Scheme interest rates
The key thing you need to know about mortgage guarantee scheme rates is that they can be high, but not necessarily higher than other 95% LTV mortgages. Generally speaking, the more deposit you have, the greater your chances of landing a favourable rate; so, it should come as no surprise that 5% deposit mortgages have some of the highest rates around.
The benefits of saving up extra deposit are plain to see. In the past it has been known that on average, 5% deposit mortgages have an interest rate that’s around one percentage point higher than the equivalent products for borrowers with 10% deposit, though not everyone is able to save up more.
If saving up more than 5% deposit is a big ask for you, the good news is that it’s still possible to get a favourable interest rate with this amount. Remember, you aren’t limited to the mortgage guarantee scheme products. There are lenders offering 95% LTV mortgages outside of the scheme, some of which might come with a lower interest rate for you.
Moreover, there are other schemes such as Help to Buy that you could consider. It’s worth comparing the rates on offer through different schemes as well as the wider market to find out which lender is offering the best deal that you qualify for. This is something a broker can help you with, since they have access to the entire market, deep working relationships with 95% LTV mortgage lenders, and expert insight on this corner of the market.
Other costs and fees
Many of the deals available through the guarantee scheme come with no extra fees, but it’s important to view this in perspective. No fees are all well and good, but if you’re paying more overall because of a higher interest rate, this defeats the purpose of a fee-free product.
While some of the other 95% LTV mortgages may have other costs to foot, such as valuation charges and product fees, they might come with a lower interest rate that will put you in pocket during the course of the mortgage, when the overall cost has been calculated.
A mortgage broker can help you work out the overall cost of every product on the market, with all fees and charges factored in, so you can make an informed decision about whether to choose a mortgage guarantee scheme deal or one of the alternatives instead.
Mortgage Guarantee Scheme lenders
The mortgage lenders offering products through the guarantee scheme at launch are…
- And more!
All of these lenders are offering a range of 91-95% loan-to-value products, including fixed-rate and tracker agreements. Some of these mortgage providers are also applying their own caveats to these deals. NatWest, for example, has placed a restriction on additional borrowing for seven years after the mortgage has been taken out, while Santander has placed a lower price cap of £400,000 on flats and leasehold properties.
As we’ve mentioned more than once already, if you’re looking for a 5% deposit or 95% LTV mortgage, these lenders are not your only options. Speak to a mortgage broker to find out what other 95% LTV deals and 5% deposit government schemes are available to you.
Alternatives to the Mortgage Guarantee Scheme
If you only have 5% deposit to put down on your mortgage, it’s important that you don’t limit yourself to the guarantee scheme since there are other options to think about.
The main alternatives to consider are…
- Other 95% LTV mortgages: These products virtually disappeared from the market during the coronavirus pandemic, but more and more have become available since the peak of the crisis. Many lenders are now offering them outside of the scheme, and some of the best deals can only be accessed through a mortgage broker.
- Help to Buy equity loan: The Help to Buy equity loan scheme has entered its third phase and is now limited to first-time buyers. If you have 5% deposit and apply through this scheme, the government loan would see your equity increase to 25%, which could mean superior rates and deals. You should speak to a broker about whether taking on an extra loan for increased equity would be worth it in the long run.
- Guarantor mortgages: If you have 5% deposit and a family member who is willing to help you out financially, a guarantor mortgage could be an option. Your guarantor would need to secure the debt against a property they own and hold equity in or place savings (usually 10% of the property’s value) in an account held by the lender.
These are some of the most popular alternatives to the guarantee scheme, but there could be other options available.
Can you apply with bad credit?
You can still apply for a mortgage through the guarantee scheme if you have bad credit, but be prepared for the possibility of even higher interest rates to offset the risk. The exact rate you will pay may depend on the circumstances surrounding your bad credit, such as how long the issue has been on your file, how severe the problem is and why it occurred.
The lenders offering mortgages through the initiative will assess bad credit applicants in line with their standard eligibility criteria. As these are high street lenders, they can be less forgiving of bad credit than specialist adverse credit mortgage providers, especially if the issues are severe ones, such as a bankruptcy or a recent repossession.
HSBC, for instance, won’t lend to anyone with arrears on their file and will turn you down outright if you have a county court judgement (CCJ) that’s less than 36 months old. Barclays, meanwhile, won’t lend to anyone who is currently in a debt management plan.
Professional advice is recommended if you have a low deposit and bad credit as the risk of rejection or having to settle for unfavourable rates is high. A broker who specialises in bad credit mortgages can offset this risk by searching the entire market for the best 5% deposit mortgage options for you, deals that might not be impacted by your bad credit.
Speak to an expert
At Boxall Brown & Jones, we have connections to amazing local mortgage brokers who can provide the best mortgage advice, tailored to your needs. When you choose to buy your property with us, we will help you 100% of the way to ensure your sale is as smooth as possible.
Can I get a guarantor mortgage through the guarantee scheme?
None of the mortgage guarantee scheme lenders currently offer guarantor mortgages, so it isn’t possible to take out one of these products through the scheme. It is, however, possible to get a guarantor mortgage with 5% deposit made up of your own funds, plus the additional equity you’d get because of the security the guarantor would provide.
Is the scheme available for new-build homes?
No. Since the mortgage guarantee scheme was launched, all the mortgage lenders involved have announced that it is not available for buying new-build properties. There are, however, ways to get a mortgage on a new-build home with 5% deposit.
The Help to Buy equity loan scheme is available for new-build houses, and some of the lenders who have launched new 95% loan-to-value products outside of the mortgage guarantee scheme don’t place any restrictions on this property type.
Are Mortgage Guarantee Scheme mortgages more expensive?
Most borrowers will find that they are more expensive than 90% LTV mortgages. As a rule, 95% LTV mortgages have an interest rate that’s higher than the equivalent products available to customers with a 10% deposit.
Moreover, some of the guarantee scheme deals currently have a higher interest rate than other 95% LTV mortgages that are available outside of the scheme. However, this isn’t true of every product and mortgage interest rates can change at any time.
Is there an age limit?
There is no strict age limit for the mortgage guarantee scheme as some of the lenders involved have no upper age restrictions at the point of application. Although a few of the participating lenders such as Santander (69 years) and NatWest (67 years) do have age limits, others will lend up to any age, under the right circumstances.
Some of the lenders do have a maximum age that the applicant can be at the end of the term, such as HSBC (79 years) but, again, there are others with no maximum age limit.
Can you use the Mortgage Guarantee Scheme for a self-build home?
No. Self-build mortgages usually call for a much larger deposit than 5%, so getting one through the guarantee scheme is not possible. However, there are specialist lenders who might consider a 95% LTV self-build mortgage under exceptional circumstances, such as when the borrower has another property or properties to secure the debt against.
Is the Mortgage Guarantee Scheme open to self-employed people?
Yes. The mortgage guarantee scheme is open to all self-employed professionals, including contractors, company directors and sole traders. The only reason you might not qualify for it, as far as your employment is concerned, is if you cannot prove your income.
Some of the guarantee scheme lenders – Natwest, for example – will request at least two years of accounts before they can approve an application. Others such as Barclays need even more than that and will not consider applicants with less than three years’ income proof.
There are, however, mortgage options for self-employed applicants with just one year’s accounts, but most experts will advise you not to limit yourself to the guarantee scheme.
If you’re self-employed with no proof of income, then the mortgage guarantee scheme won’t be an option for you.
Did this guide help?
Why not follow our social medias for more property advice?