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Mortgage guarantee scheme explained

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Mortgage guarantee scheme explained

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Last reviewed on 30th August 2021

The mortgage guarantee scheme launched in April 2021 and enables buyers with a 5% deposit to get a mortgage. The remaining 95% of the mortgage is partly underwritten by the government.

The scheme isn’t limited to first-time buyers, as those wanting to move home can also apply. That being said, the scheme does come with its risks so do speak to an advisor before applying.

95% mortgages often have higher rates than average. As a result, saving for a slightly higher deposit can reduce your costs quite significantly.

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What is the mortgage guarantee scheme?

The mortgage guarantee scheme allows buyers to get a mortgage with a 5% deposit. In other words, you’ll be taking out a 95% mortgage.

Key features of the scheme:

  • The scheme runs until December 2022
  • Can be used on both new builds and older properties
  • Property values can’t exceed £600,000
  • First-time buyers and existing homeowners can apply
  • 5-year fixed-rate mortgages will be available
  • Only available on a repayment basis and not interest-only
  • Applicants will still need to qualify and meet certain criteria

Why is the government offering 95% mortgages?

The government introduced the mortgage guarantee scheme for a number of reasons:

  • To help first-time and home movers in a difficult financial climate
  • Financial support for lenders by underwriting part of the mortgage
  • Aims to stimulate the property market and the overall UK economy

Prior to the pandemic, finding a mortgage with a 5% deposit wasn’t too difficult. Due to tough economic conditions, lenders couldn’t continue to offer mortgages with such small deposits.

The mortgage guarantee scheme is set to help lenders ease back into offering mortgages with 5% deposits.

Which lenders offer the mortgage guarantee scheme?

Lenders that offer the mortgage guarantee include:

  • Natwest
  • Lloyds Bank
  • Santander
  • Virgin Money
  • HSBC

More lenders are set to join the scheme. With the government underwriting 95% of the mortgage, lenders have the confidence to lend at this level once again.

How can I apply?

It’s important to speak to a mortgage advisor prior to applying. This is so that they’re able to check your application qualifies.

If you approach lenders yourself, you risk being declined. This is because 95% mortgages are considered to be high-risk for both you and your lender.

Your advisor will check your income, credit file and property details to ensure your application is suitable for the scheme. Furthermore, each lender has its own mortgage rates so it’s important to find the best deal possible.

Slight differences in rates and fees can result in huge savings.

ask a mortgage broker

What rates are available on the mortgage guarantee scheme?

95% mortgages are risky, so there are certain conditions you must be aware of. For instance, your mortgage interest rate will typically be higher than mortgages with larger deposits.

Mortgages with low deposits typically have the highest risk attached. This is why lenders increase their mortgage rates to compensate for the additional risk.

Having a 10% deposit may unlock cheaper deals. If you’re able, it can make better financial sense to save for a slightly higher deposit. Although you’re placing more money down, it’s likely you’ll save money over the length of your mortgage term.

The other risk with 95% mortgages is that if property prices fall, you could fall into negative equity. This then makes it difficult to remortgage to a better rate which could make your mortgage very expensive.

What is the stamp duty holiday?

The stamp duty holiday has been extended for an additional three months. This was also mentioned in the Spring Budget 2021, alongside the mortgage guarantee.

Initially, the stamp duty holiday was introduced to help relieve home buying costs during the pandemic.

Key points of the stamp duty holiday include:

  • Stamp duty is suspended on the first £500,000 of all sales in England and Northern Ireland
  • The holiday ended in June 2021
  • After June 2021, the nil rate band was set at £250,000 until the end of September 2021
  • The usual nil rate band level of £125,000 will return in October 2021

Speak to an advisor if you’re unsure of whether you’ll have to pay stamp duty.

Alternatives to the mortgage guarantee scheme

The mortgage guarantee scheme is just one of many ways to get on the housing ladder.

There are other schemes available which you can also explore such as:

Each scheme has its own terms and conditions so you’ll need to be sure you qualify before applying. There are also schemes such as the Right to Acquire scheme which allows tenants to buy their rental property.

There are other options, such as applying for a mortgage with a guarantor. This method can be particularly useful when you don’t quite meet a lender’s criteria.

You can speak to an expert if you’re unsure about which scheme to use. We’ll then check your financial situation to let you know which scheme you qualify for.

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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.