How Does the Mortgage Guarantee Scheme Work?

How does the mortgage guarantee scheme work?

Earlier this year the government announced a new 95% mortgage guarantee scheme. The scheme was created as a response to the significant reduction in 95% LTV mortgages available from lenders in early 2021 causing a barrier to entry for households who would previously have met affordability criteria.

The scheme is a bid to stimulate the property market and support first time buyers trying to get on the property ladder or existing homeowners looking to take a step up. But how does it work, and do you qualify?

How does the Mortgage Guarantee Scheme work?

The government-backed mortgage scheme aims to “turn ‘Generation Rent’ into ‘Generation Buy”, by providing a government guarantee to lenders to incentivise them to provide mortgages of 95%. It provides the lenders with a guarantee for 15% of the loan for a seven-year period, therefore reducing their risk. This could be considered equivalent to the buyer having a 20% deposit, 5% deposit plus the 15% guarantee and allows the bank to lend accordingly. It should be noted however, that the government are not guaranteeing the mortgage payments on behalf of mortgagees; individuals remain fully and legally responsible for their payments.

Who qualifies for the Mortgage Guarantee Scheme?

Like all other mortgages, mortgages under the mortgage guarantee scheme will be granted based on the eligibility and creditworthiness of those applying for the loan. The scheme can be used by first time buyers and existing homeowners.

Are there any restrictions on what I can buy?

The mortgage guarantee scheme is applicable to any property with a value up to £600,000, that is not a second home or buy to let property. Individual lenders have specified some of their own criteria in cases, so you will need to carefully check that you meet their criteria, for example, some have further restrictions on the values of apartments vs houses that can be purchased under the scheme.

What sort of mortgage can I get under the scheme?

The mortgages available under this scheme must be repayment mortgages which means that borrowers must repay both a portion of the capital as well as the interest. In addition, participating lenders have had to commit to offering a 5-year fixed rate mortgage as part of their range, providing the added security of predictable repayments for borrowers.

Which Banks are offering the scheme?

Banks can elect whether to implement mortgages under the Mortgage Guarantee scheme and as a result some have opted out. Most of the high street banks are offering the 95% mortgages including Barclays, HSBC, Lloyds, Natwest, Santander, and Virgin Money. Other banks and lenders may provide 95% mortgages, such as TSB, but are not part of the scheme.

Will a Mortgage Under the Guarantee Scheme Cost Me More?

There may be stricter rules relating to the value of the loan to income to de-risk the mortgages for banks, but this is unlikely to change the cost of the mortgage for those who meet the criteria for the loan. There is a fee that the lender must pay the government for each mortgage under the scheme. This fee is likely to be passed onto mortgagees in one way or another.

When do I apply?

You can apply for a mortgage under the Mortgage Guarantee Scheme once you have put in an offer on a property, but you should try and get an Agreement in Principle beforehand. Most of the banks offering the scheme are not offering online registrations for this scheme and instead require a phone or face-to-face meeting. It’s worth talking to the banks offering the scheme or getting a mortgage advisor to help you.

The Mortgage Guarantee Scheme at a Glance

  • Deposit Required: 5% - 9%
  • Mortgage Amount / Loan to Value: 91% - 95%
  • Property Value: Up to £600,000
  • Mortgage Type: Repayment Mortgage
  • Available until December 2022

The mortgage guarantee scheme is one of several mortgage solutions designed to help people get either their first mortgage product or climb the ladder. Watch this space for upcoming articles about the help-tobuy scheme for new homes and guarantor mortgages that can help you afford to buy the home you need

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Disclaimer: This blog post is produced for general guidance only, and professional advice should be sought before any decision is made. Nothing in this post should be construed as the giving of advice. Individual circumstances can vary and therefore no responsibility can be accepted by the contributors or the publisher, Gordon & Co, for any action taken, or any decision made to refrain from action, by any readers of this post.