5% Deposit – The Mortgage Guarantee Scheme

What is the Mortgage Guarantee Scheme?

Following the 2021 Budget, the Government announced a new Mortgage Guarantee Scheme, which is intended to encourage more lenders to offer high Loan to Value lending. It’s purpose is to enable more First Time Buyers of the current generation, buy their first home more easily. It is not limited to use by First Time Buyers, however, and there is the potential for all creditworthy mortgage applicants to benefit from the scheme.

It was created in response to a huge decline in mortgage applications over the past year, by those unable to offer a significant deposit. This is as a result of a dramatic decline in lenders willing to offer mortgages at higher Loan to Value (such as 95%), following the coronavirus pandemic and economic instability. It launched in April 2021 and is expected to be available until December 2022.

How does it work?

It allows lenders to obtain a Government-backed guarantee for applicants applying for a 91% or higher Loan to Value mortgage

The scheme is intended to be simple for the borrower and there are no further requirements on them than they would find in a standard mortgage application. The Government will offer a guarantee to the lender, for which they pay a small fee, in return for offering borrowers a 91-95% mortgage. These also have to be Fixed-Rate mortgages, with a fixed period of at least five years, to help applicants budget more effectively.

This guarantee protects the lender in the event that your home is repossessed (although you should understand that it offers no protection to yourself as the borrower). What it does mean is that borrowers will have more access to higher Loan to Value mortgages and therefore your deposit requirement will be lower.

Does not incentivise irresponsible lending

To ensure that lenders do not use this guarantee to lend without due care and attention, there is a clause in the policy that holds lenders liable for 5% of any losses incurred. This means you will still need to fulfil the usual criteria to obtain a mortgage offer.

What qualifying criteria are there for the Mortgage Guarantee Scheme?

In order to be eligible for a guarantee under the scheme, a mortgage must meet the following criteria:

• Be a residential mortgage for a first / only home (not Buy-to-Let)
• Offered only to an individual or individuals (no incorporated companies)
• The property must be in the UK and valued at £600,000 or less
• Have a Loan-to-Value of between 91% and 95%
• Originate between the dates specified by the scheme (April ‘21 – Dec ‘22)
• Must be a repayment mortgage
• Applicants must be subjected to a loan-to-income and credit score test

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

Although this scheme will make it easier for ‘generation rent’ to become homeowners, the Government guarantee is based on responsible lending. This means that you will still need to meet the acceptance criteria for a standard residential mortgage, which includes affordability and a strong credit score.

How do I improve my credit rating?

Before you apply for a mortgage check your credit score with a credit reference agency. Ensure all of the information is correct and that you appear on the electoral roll. Reduce any debts you do have as far as possible and don’t take out any more credit.

As well as increasing your overall chance of acceptance, having a better credit score can give you access to better mortgage deals.

What other fees will I need to pay?

Stamp duty

Stamp Duty is paid on all properties priced over £125,000, as follows;

£0 – £125,000 = 0%

£125,000 – £250,000 = 2%

£250,001 – £925,000 = 5%

£925,001 – £1.5 million = £10%

£1.5 million + = 12%

Other fees

Solicitors fees, mortgage arrangement fees and the cost of searches and surveys on your new property should be considered when buying a new home. Our advisers can help you plan these costs.

How can CD Financial Mortgage Brokers help?

Here at CD Financial, we have access to a wide variety of lenders, many of whom have already started to re-introduce higher Loan-to-Value lending.

We can help you to find a lender willing to offer mortgages under the new Mortgage Guarantee Scheme, meaning that your new home is in closer reach than you think.

We can also help ensure you make the most of the fixed-rates available by finding those lenders with the most suitable mortgage deal for your circumstances. Contact us today for a chat about how we can help you.

Your home may be repossessed if you do not keep up repayments on your mortgage.