How does the Government's 95% Mortgage Guarantee Scheme work?
In the 2021 Spring Budget, the Chancellor announced a mortgage guarantee scheme to encourage banks and building societies to offer 95% mortgages to homebuyers.
The scheme was introduced as part of a wide range of measures to support the UK housing market and economy during the COVID-19 pandemic.
How does the scheme work?
Under the scheme, a homebuyer with a 5% deposit can access a 95% loan-to-value mortgage. The scheme is Government-backed, meaning that if the lender lost money, the Government would cover some of the losses incurred.
The scheme will start in April 2021.
Who is eligible?
The 5% deposit scheme is open to both first-time buyers and existing homeowners.
To qualify, a buyer must have at least a 5% mortgage and must satisfy a mortgage lender’s other criteria. The most important of these being the affordability criteria used to determine whether a buyer can afford to make the monthly payments needed to pay off the mortgage.
In addition, the property’s purchase price must be no more than £600,000, and the property must be the buyer's main residential home in England or Wales. The scheme cannot be used to purchase a buy-to-let property.
How long will the scheme run for?
The scheme is set to run from April 2021 to December 2022.
Are there any downsides?
The Government has said that the 5% deposit scheme is based on the Help to Buy (HTB) mortgage scheme, which ended in 2016. Although the HTB scheme did help some first-time buyers get on the property ladder, it was argued by some property commentators that the scheme also contributed to rising house prices.
It is reasonable to expect that the 5% deposit scheme will have a similar effect on house prices. In combination with an extension to the Stamp Duty ‘holiday’ announced in 2020, house prices are likely to continue to rise as more buyers are able to afford the property.
Most major banks are supporting the 5% deposit scheme. Some lenders who aren’t taking part in the scheme are offering equivalent deals to would-be buyers. For buyers, there is no special benefit to choosing a scheme-backed mortgage over a standard 95% mortgage.
Compared to rates for a 10% or 20% deposit, rates for 95% mortgages tend to be much higher. Although interest rates are likely to remain low for some time, buyers who can afford to save for a larger deposit may find that getting a better rate is worth saving for.
Are other schemes available to help buyers?
There are several other schemes available to help purchasers get on the property ladder. Eligibility for these options tends to be more restricted. These include:
Help to Buy equity loans and ISAs
The Help to Buy scheme launched in 2013 initially comprised three parts. Help to Buy mortgage guarantees (which ended in 2016), Help to Buy ISAs (which ended in 2019), and Help to Buy equity loans.
The Help to Buy equity loan scheme helps buyers of property sold at £600,000 or less. Under the equity loan scheme, buyers can borrow up to 20% of the purchase price (40% in London). This loan is used in combination with a standard mortgage.
To qualify, buyers must have at least a 5% deposit. The scheme is set to end in 2023.
Right to buy
The Right to Buy scheme is open to council tenants in England, Wales and Northern Ireland. Under the Right to Buy scheme, a tenant can purchase their home from their local council for a below-market price.
Other public sector-owned residential property, such as homes owned by housing associations, the NHS or the armed forces are also eligible for the Right to Buy scheme.
To qualify, a tenant must have rented property from the public sector for at least three years, although these years don’t have to be consecutive.
Under shared ownership, a buyer would purchase a share in a property, with a mortgage, and rent the remaining share. The value of the share the buyer purchases must be between 25% and 75% of the property’s total value.
To qualify for shared ownership, a buyer must have a household income of under £80,000 (£90,000 in London).
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