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Mortgage Guarantee Scheme 2021: Everything You Need to Know

By Pete Mugleston

Published: 3rd March 2021 Last updated: 20th April 2021

📢 *UPDATE 19/04/2021: The mortgage guarantee scheme launched on 19th April and we have updated this guide to include the latest information on it 🏠

With the end of the stamp duty holiday and ongoing coronavirus uncertainty threatening to hit the property market hard, the UK Government was under pressure to offer a lifeline to first-time buyers and people with low deposits in its Spring Budget, and these calls didn’t fall on deaf ears. Chancellor Rishi Sunak has unveiled a new mortgage guarantee scheme to bring high loan-to-value (LTV) mortgages back with a bang.

With the scheme now underway, we’ve put together this guide for anyone hoping to use it to get on the property ladder or move to a new home. In it, you’ll learn how the new initiative works, how to apply for it, and how a mortgage broker can help you breeze through the application process.

What is the new mortgage guarantee scheme?

The new mortgage guarantee scheme is an initiative announced as part of the UK Government’s 2021 Spring Budget. It aims to help people get onto the property ladder with just 5% deposit. This is good news for anyone looking for a low deposit mortgage because banks and building societies pulled virtually all of their 95% LTV products during the coronavirus pandemic.

All mortgage lenders participating in the new scheme are obliged to offer a product with a five-year fixed rate as part of their range, which means the customer can lock themselves into a discounted rates period for this amount of time. After the five years have elapsed, the borrower will be switched to the lender’s standard variable rate (SVR) unless they remortgage.

A similar mortgage guarantee scheme was introduced as part of the Help to Buy programme. It ran for four years and helped more than 100,000 people get onto the property ladder.

How does it work?

The scheme encourages mortgage providers to take more risks with their lending, and the Treasury will help them do this by guaranteeing a portion of the loans on homes worth up to £600,000. This basically means that the government is taking on some of the risk that comes with higher-LTV lending and is offering incentives to lenders who reintroduce 95% LTV mortgages. They will charge a commercial fee for providing the guarantee, which will be valid for seven years after the mortgage’s start date.

As far as prospective borrowers are concerned, they simply need to save up at least 5% of the property’s value as deposit and apply for a mortgage as normal. Exactly which low-deposit mortgage products you qualify for will depend on your overall mortgage eligibility and creditworthiness.

A mortgage broker who specialises in low-deposit deals will be able to tell you which lenders you can approach for a mortgage guarantee scheme application, as well as identify the best one for you.

Is the mortgage guarantee scheme only for first-time buyers?

No, but they are the people who are expected to benefit most from it. The scheme is open to anyone with a 5% deposit, whether they’re a first-time buyer or a homemover. The main caveat is that there is a maximum property value of £600,000. Anything pricier than this will not be covered.

When is the scheme due to end?

The scheme will run between 19th April 2021 and December 2022 initially. The government has pledged to review the initiative when it is due to end and assess whether an extension is needed.

How to qualify for the new mortgage guarantee scheme

To qualify for the 2021 mortgage guarantee scheme you will need to be a first-time buyer or a homemover who meets the following criteria…

  • Has at least 5% of the property’s value to put down as a deposit
  • Is buying a property worth no more than £600,000
  • The property must be a primary residence, not a second home or a buy to let
  • The applicant must an individual or individuals, not a company
  • The mortgage must be a repayment agreement, not interest-only

If you tick all of those boxes, there’s nothing stopping you from applying for a 95% mortgage with one of the lenders who has reintroduced them, but the mortgage provider will have their own in-house requirements that you must meet as well. Given that 95% mortgages carry a high level of risk under most circumstances, some lenders will still have a stringent eligibility criteria.

Most will assess your eligibility and creditworthiness based on the following…

  • Credit history: Clean credit is usually preferred for low-deposit deals, but there are specialist bad credit mortgage lenders for borrowers with various types of credit problems.
  • Income: Some lenders prefer secure, full-time employment for higher-risk mortgages, but there are lenders who specialise in self-employed mortgages and complex income types. You can borrow up to 4.5 times your income on a mortgage guarantee scheme agreement.
  • Outgoings: Borrowers with a high debt-to-income ratio might find that they don’t qualify for some low-deposit mortgages. This is usually determined on a case-by-case basis.
  • Age: Options will likely be more limited if you’re 75 or over, or the mortgage term runs into your retirement years. Luckily, there are brokers who specialise in later-life lending.
  • Property type: Unlike some past government schemes, this one is not limited to newbuild properties, but you might find your lending options restricted and need to seek specialist advice if the property you’re buying is non-standard or has an unusual build type.

Which lenders will offer mortgages under the scheme?

Some of the UK’s biggest mortgage lenders have confirmed that they will be offering 5% mortgages under the new guarantee scheme. The ones announced so far are Lloyds, Natwest, Santander, Barclays and HSBC, with Virgin Money set to pledge their support to the scheme in the near future.

Potential alternatives to consider

Although 95% LTV mortgages have been difficult to come by since the beginning of the COVID-19 crisis, the new mortgage guarantee scheme isn’t the only way to get on the property ladder with a low deposit. Here are some possible alternatives to consider…

  • New 95% LTV mortgages: Since the guarantee scheme was announced, several mortgage lenders have announced their own 95% LTV mortgages outside of it. They include Bank of Ireland, Coventry Building Society and Accord, part of Yorkshire Building Society. Some of these products are only available through a broker.
  • Lifetime ISAs: If you’re a first-time buyer and have the time to save, a Lifetime ISA could help you increase the amount of deposit you can put down for your home. You can put away up to £4,000 per year and the government will add an extra 25% to your pot. You will need to hold your LISA for at least a year and the property value must be no more than £450,000.
  • Shared Ownership: Shared Ownership is aimed at first-time buyers and low-income households, and is a kind of middle ground between homeownership and renting. Through the scheme, you can buy a percentage of a new build or resale home (usually 25-75%) and jointly own it with a housing association. You will pay them rent on the share that they own, and it is usually possible to up your stake over time through a process called ‘staircasing’.
  • Guarantor mortgages: A guarantor mortgage could be an option if you have a close family member who’s willing to support your mortgage application. This would require them to secure your mortgage debt against a property they own or place savings into an account held by the mortgage lender. They also have to agree to make any mortgage payments you miss.
  • Borrow deposit funds: A small minority of lenders consider applications based on borrowed deposit funds. It might be worth speaking to a mortgage broker about whether borrowing extra funds to bulk up your deposit could help you get a better deal and save money in the long run. This is an option that should only be considered with professional advice, though.

How to apply for a mortgage through the new guarantee scheme

If you’ve got enough deposit saved up (5% or more) and found a property you want to buy, your next step is to find a mortgage lender that is offering 95% LTV products through the new government scheme. This might not be too difficult, but it’s vitally important that you find the right lender, as approaching one at random could mean paying more in interest or ending up with unsuitable terms.

With this in mind, your best bet is to find a mortgage broker who specialises in low-deposit deals. They will know exactly which lenders are offering the best rates for customers who are applying through the government’s guarantee scheme, and they will look at your needs and circumstances and narrow the list down to one mortgage provider, the one who’s best positioned to help you.

We offer a free broker-matching service that can pair you up with your ideal mortgage advisor, a fully-vetted expert with the knowledge and expertise to get you the finance you need through the new mortgage guarantee scheme, at the best interest rate available.

Call us on 0808 189 2301 or make an enquiry and we’ll set up a free, no-obligation chat between you and your perfect mortgage broker today.

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