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95% mortgage guarantee scheme

Find out how the mortgage guarantee scheme works and whether it could help you buy your first home with a 5% deposit.

In this article
What is the mortgage guarantee scheme? Why has the government launched this scheme?  Who is eligible to apply? Which lenders offer mortgages under the scheme?
What rates are available on 95% mortgages? 95% mortgage calculator: how much can you borrow? Alternatives to the mortgage guarantee scheme

What is the mortgage guarantee scheme?

The mortgage guarantee scheme, launched on 1 April 2021, involves the government ‘guaranteeing’ 95% mortgages for buyers with 5% deposits. 

The scheme was announced in the March 2021 Budget and is designed to encourage banks to start offering 95% mortgages again, after nearly every single one was withdrawn during the pandemic.

Under the terms of the scheme, the government guarantees the portion of the mortgage over 80% (so, with a 95% mortgage, the remaining 15%). This might sound complicated, but in practice it just means the government will partially compensate the lender if a homeowner defaults on (fails to pay) their mortgage.

The scheme is quite similar to the Help to Buy mortgage guarantee scheme, which ran from 2013 to 2016 and was used by 105,000 buyers.

 

Why has the government launched this scheme? 

Since the start of the Covid-19 pandemic in March 2020, the number of low-deposit mortgages has plummeted.

In just under a year, the number of 95% mortgages available to first-time buyers fell from 391 to just three, as lenders shied away from riskier loans.

The scheme aims to give banks the confidence to offer 95% mortgages again by taking on some of the risks involved with doing so. 

Who is eligible to apply?

The mortgage guarantee scheme is available to first-time buyers and home movers across the UK.

You’ll need to be buying a property to live in yourself – second homes and buy-to-let properties are not permitted. Both new-build and existing properties priced up to £600,000 are eligible. 

You’ll need to apply for a repayment (not interest-only) mortgage and pass standard affordability checks, including a loan-to-income test and credit score assessment.

Finally, the mortgage you’re applying for will need to be for between 91% and 95% of the value of the property you’re buying, which you'll see described as 'LTV'.

The scheme will initially run until 31 December 2022, though this will be reviewed before the end date.

Which lenders offer mortgages under the scheme?

Major banks including Barclays, HSBC, Lloyds Bank, NatWest and Santander have committed to launching 95% deals.

Under the terms of the scheme, participating lenders need to offer a five-year fixed-rate mortgage as part of their range. The government says this will give borrowers the security of predictable repayments for a longer period.

What rates are available on 95% mortgages?

As lenders begin to launch their deals, we’ll be able to get a clearer picture of how affordable the rates will be.

Interest rates on 90% mortgages are currently considerably higher than they were before the start of the pandemic, and it remains to be seen whether the influx of 95% deals will push costs down for first-time buyers.

95% mortgage calculator: how much can you borrow?

Alternatives to the mortgage guarantee scheme

Generally speaking, the higher the proportion of the property price you borrow, the higher the rate of interest you’ll pay on your mortgage. 

For that reason, if you’re able to save for a little longer and apply for a standard 90% mortgage it could be well worth it in the long run. 

And if you’re thinking of buying a home with a 90% mortgage now, you might be better holding off for a little while to see if rates drop once more lenders launch their 95% deals.

There are some other schemes that can help you buy a home with a small deposit.

  • The Help to Buy scheme offers a 20% equity loan (40% in London) from the government on new-build properties in England. It is now limited to first-time buyers only, and regional price caps apply. Wales has its own version of Help to Buy, but Northern Ireland and Scotland don’t currently offer it.
  • If you’re looking to buy a home in an expensive area such as London, a shared ownership scheme could offer you a route on to the ladder. These schemes involve purchasing a stake of as little as 25% of a property and paying rent on the remainder. A word of warning, though – the overall monthly costs of shared ownership schemes can be high.
  • Finally, lenders currently offer a range of guarantor mortgages, which allow a parent or family member to help you buy a home. Guarantor mortgages usually involve the family member using their home or savings as collateral in case you default on your mortgage, but innovative products such as 'joint borrower sole proprietor' mortgages could be an alternative for some.

Find out more: how to buy a house

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