5% Deposit Mortgage Guarantee Scheme

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What is the Mortgage Guarantee Scheme?

Whilst the mortgage industry as a whole maintained stability throughout 2020, a significant decline was noticed in mortgages obtained by applicants with low deposit availability. This is as a direct result of the vast drop in Mortgage Lenders offering high Loan to Value mortgage products.  An industry-wide loss in confidence to lend to higher risk borrowers, especially those affected by the coronavirus pandemic. 

To try and reinvigorate the mortgage market for those with lower deposit availability, the governmentl introduced the Mortgage Guarantee Scheme in April 2021. It’s goal is to encourage lenders to feel confident in offering higher Loan to Value mortgage products, such as 95% mortgages. This should assist First Time Buyers, as the most severely affected group, to source mortgages without the need for a large deposit. The scheme, which is set to run until December 2022, is also available to all other creditworthy mortgage applicants who want to buy a home.

How does it work?

Allows lenders to obtain a government-backed guarantee for applicants applying for a 91% or higher Loan to Value mortgages

As a part of the Mortgage Guarantee Scheme, the government offers a low-cost guarantee lenders offering mortgage products to borrowers at 91-95% Loan to Value. Mortgages secured under the scheme also have to include a Fixed-rate period of at least five years.

The guarantee protects Mortgage Lenders against significant financial loss in the event your home is repossessed, however, it offers no protection to you, as the borrower. Borrowers will find, however, that the availability of lenders offering 95% mortgage deals will increase, reducing your deposit requirement and making it much easier to secure a mortgage than it was last year, especially with house prices rising.

Does not incentivise irresponsible lending  

To deter irresponsible lending, the government has included a clause in the policy, holding lenders liable for 5% of any losses incurred as a result of their high Loan to Value lending under the scheme.

What qualifying criteria are there for the Mortgage Guarantee Scheme?

In order to offer you a mortgage via the Mortgage Guarantee Scheme, all lenders must ensure:

  • It’s for a residential mortgage for a first and/or only home (not Buy-to-Let)
  • Mortgages are only offered to individuals (no incorporated companies)
  • The property is in the UK and valued at £600,000 or less 
  • They offer a high Loan to Value Mortgage (91-95%)
  • Only offer the mortgage between April ‘21 and Dec ‘22
  • They only offer Repayment Mortgages, not Interest-only
  • All applicants must be subjected to affordability and credit score test

Do I need a good credit score to access a 95% mortgage via the Mortgage Guarantee Scheme?

Although the scheme is intended to help people obtain a high Loan to Value mortgage more easily, the government guarantee is based on responsible lending. This means that you’ll need to meet the lender’s acceptance criteria. Whilst they vary somewhat, all acceptance criteria include affordability and credit score checks. Lenders will usually be looking for a strong credit score to lend at this level.

How do I improve my credit rating?

It’s easy to check your credit score online these days, so make sure you do so prior to making a mortgage application. If you need to improve your score, check that all information held on file about you is correct and that you’re on the electoral roll at your current address. You should also take every step to reduce any debts that you have and make sure you don’t apply for any more credit.

What other fees will I need to pay?

Stamp duty

If you buy a house above the value of £300,000 in the UK, you will usually need to pay Stamp Duty. There is currently a suspension of Stamp Duty tax on properties up to the value of £500,000, however, until the end of June 2021.

Other fees

Some of the more advanced mortgage calculators can help you to plan for these costs, although they will vary from firm to firm. Alongside your deposit, you should be prepared to pay solicitors fees, mortgage arrangement fees and the cost of searches and surveys on your new property.

How can Heritage help?

At Heritage, we have access to a wide variety of high street and independent Mortgage Lenders, some of whom are already increasing their lending. Our Mortgage Brokers can advise you about which lenders are offering high Loan to Value mortgages under the new Mortgage Guarantee Scheme and how to pick the deal most suited to you. Our goal is to help you make the most of the mortgage deals available to you, whilst supporting you throughout the process to ensure you have a smooth path into homeownership.

Why Heritage Mortgages?