20 April 2021

New mortgage guarantee scheme: buying your home with a small deposit

By Mel Robson, Associate, Hayes + Storr.

Last year saw a sharp jump in the amount of deposit required to get a mortgage, with some people having to provide a deposit equivalent to a full year’s salary. To help tackle this problem, the Government has introduced a new mortgage guarantee scheme until December 2022.

The 95 per cent mortgage guarantee scheme

The new mortgage guarantee scheme, announced in the Spring Budget, is designed to encourage lenders to start offering higher loan-to-value mortgages.

Under the scheme, the Government will guarantee the part of your mortgage which is over 80 per cent of the purchase price, thereby making the loan less risky for the lender.

If you default on your mortgage payments, the lender may ultimately sell your property. With a 95 per cent mortgage, there is a higher risk the sale proceeds will not cover the outstanding loan if property values fall. If you cannot make up the difference, then ordinarily the lender will suffer the loss.

Under the new scheme, the Government will compensate the lender for up to 15 per cent of the original purchase price (the borrower’s deposit covering the first five per cent).

Most major banks have already said they plan to launch 95 per cent mortgage deals, with other lenders likely to follow suit.

To benefit from the scheme, you must satisfy certain conditions as a borrower. For example, you must:

  • be buying your main home, not a holiday home or a buy-to-let investment;
  • buying a property in the UK for £600,000 or less;
  • borrow between 91 per cent and 95 per cent of the purchase price;
  • meet standard borrowing requirements to prove you can afford the repayments; and
  • take out the loan during the term of the scheme, between April 2021 and December 2022.

It is expected that first-time buyers will find it easier to secure finance for a home purchase even with a small deposit.

Some words of caution

Consider carefully how any funding arrangements would apply to your personal circumstances. A high loan-to-value mortgage generally means paying a higher rate of interest, so always shop around and take independent financial advice before signing up for a deal. The new scheme guarantees the lender against loss, not you as the borrower.

As with any mortgage, if you cannot keep up the repayments, you risk losing your home. So, it is vital to check you can afford the repayments even if your circumstances change or interest rates go up.

Consider the alternatives

If you can afford it, and you think your income is stable or will increase in the future, then a 95 per cent mortgage may still be an attractive option. Even so, it is worth considering some of the alternatives, including:

  • Help to buy
  • Saving for a larger deposit
  • Shared Ownership

For further information, please contact Mel Robson in the residential property / conveyancing team on 01553 778900 or email law@hayes-storr.com.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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