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Mortgage guarantee scheme explained

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HomeMortgage Help GuidesMortgage guarantee scheme explained

Mortgage guarantee scheme explained

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Last reviewed on 2nd March 2022

The mortgage guarantee scheme launched in April 2021 and allows buyers to get a mortgage with a 5% deposit. 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.

What is the mortgage guarantee scheme?

The mortgage guarantee scheme allows buyers to get a 95% mortgage, meaning you’ll only require a 5% deposit. The government will then underwrite part of the mortgage, typically over 80%. This means that with a 95% mortgage, the government may underwrite 15% of the loan, which also gives lenders an incentive.

Key features of the scheme include:

  • 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 criteria

Why is the government offering a 95% mortgage scheme?

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

  • To help first-time buyers 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. As a result, the scheme is helping lenders ease back into offering mortgages with 5% deposits.

Am I eligible for the scheme?

Although the scheme is open to first-time buyers and home movers, you’ll need to be buying the home for yourself. Buy to let and second homes are strictly forbidden with the scheme.

It’s important to speak to a mortgage advisor prior to applying if you plan on using a 5% deposit. This is so that we’re able to check you qualify. Approaching lenders yourself can result in you being declined. This is because mortgages with smaller deposits 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.

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.

ask a mortgage broker

Are 95% mortgage rates expensive?

95% mortgage rates are typically higher due to the risk involved, so there are certain conditions you must be aware of. For instance, your mortgage interest rate is likely to 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, you can 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.

Are there 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. It’s also possible to apply 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.