Government Mortgage Guarantee Scheme
Government Mortgage Guarantee Scheme
A new Government initiative launched on the 19th April with the aim of helping predominantly First Time Buyers with smaller deposits on to the housing ladder.
The scheme allows borrowers to access 95% mortgages through a number of lenders by way of the Government guaranteeing part of the loan.
Although aimed at First Time Buyers, it can be used by people who want to move, but for whatever reason have a limited amount of equity in their homes, as well as people who have had a mortgage before but do not have one at present.
What is a 95% mortgage?
The 95% refers to the amount you can borrow when shown as a percentage of the value of the property you are buying. To put it simply, if the house is valued at £100,000 then a 95% loan would be £95,000. A house valued at £200,000 would have a 95% loan of £190,000, A £300,000 house would be £285,000 etc.
While the basic maths regarding 95% loans is pretty straightforward, there are some things to consider that make it a little less straightforward.
If the valuation of the property is deemed to be different to the asking price, then the loan offered will also be different. Although the same principles apply whatever the loan to value, it is where these higher loan to value percentages can have a bigger effect, as even a small cash difference in the value can have a effect on the percentages that are being used by the lender. Thankfully, in most cases, the purchase price is adjusted to reflect the lenders valuation. However, it is not impossible for such a hiccup to completely derail the purchase.
A 95% mortgage represents the loan to value of the property and nothing else. Although many mortgage schemes may offer free valuations and other incentives, you will still have costs and fees to meet. These will often run into several thousand pounds and even if you have the option of adding some of the costs to the loan, that will usually only be permitted as long has the total amount borrowed does not exceed 95% of the value of the property.
What is the benefit of this scheme to the borrower?
Apart from encouraging lenders to offer a 95% mortgage, there is no real benefit to the borrower. The benefit is to the lender instead because the Government are guaranteeing a part of the loan for them. The main reason that lenders are reluctant to lend high loan to values is because the chances of the borrower falling behind, or even defaulting, increase at higher loan to value mortgages. By offering this guarantee, the lender is more confident about the return on their money.
Even if the borrower defaults, the lender will still chase the borrower for the money that is owed, so in reality very little is being put at risk by either the lender or the Government.
It should also be noted that the mortgages offered under this scheme will run as any other mortgage, even another 95% mortgage that is not being run under this scheme. The borrower will not notice any difference.
What are the terms and conditions for the borrower?
This scheme will continue until December 2022 and, like a similar scheme that ran a few years ago, it has a condition that the lenders will have to offer a long term fixed rate as an option.
Anyone with a 5% deposit is eligible to apply for one of these mortgages which are only available from a select number of lenders. There are a number of conditions regarding them though.
• The mortgage must be for a residential property in the UK that you are going to live in. They cannot be used for buy to let or second homes.
• Although emphasis is being given to the 95% loan to value feature of the scheme, the mortgages are available for anyone who can raise between 5% and 9% of the purchase price.
• They cannot be used on an interest only mortgage.
• The maximum purchase price is £600,000.
• All the normal mortgage lending criteria must be met. This includes affordability and credit checks.
How suitable will these mortgages be?
As with any mortgage product, the benefits will only be benefits to those with the needs that match the features in the product.
By giving the lenders the means to offer 95% mortgages then it can only help those with a smaller deposit to get on the path to home ownership. That being said, there are a few lenders that are offering 95% deals that fall outside of this scheme that might be more suited to an individual’s needs.
There might be options other than having to use a 5% mortgage available to the borrower such as shared ownership or taking advantage of a gifted deposit.
The best mortgage deals tend to be those that have larger deposits, so while the actual rates can only be speculated, it is safe to expect that they will not be the cheapest on the market by any measure.
The best way to find out is to talk with an independent, experienced and qualified mortgage broker who will be able to find the mortgage that is best suited to the situation.
Advantages of a larger deposit
The two big advantages of having a larger deposit are the availability of lower rates and the bigger choice available of mortgages.
Typically, interest rates get lower as the amount of deposit rises. If you can find a 20% or 25% deposit then the savings can be quite noticeable. The availability of mortgage offers such as fixed or discounted rates is also much wider if you have a larger deposit.
One of the main ways a larger deposit can be found is by way of a gifted deposit. This is where a relative, usually a parent or grandparent, gives the money to the purchaser to use as a deposit. As it is not likely for the parent or grandparent to have such an amount available in cash, it is becoming very common for the money to be raised by way of a mortgage or equity release.
Here is a link giving the details of how this can work in practice. Using Equity Release to gift a deposit
Schemes such as this new mortgage guarantee scheme are great at shining a light on the difficulties faced, especially by first time buyers, when it comes to buying a home. However, to get the best solution the situation needs to be looked at holistically, and that can mean looking outside the box for options that might not seem immediately apparent.
If you are looking at buying a home and want to find the best way of going about it, Means to a Lend have access to both Equity Release specialists and Independent Mortgage specialists who are able to work together to help you achieve what you want to achieve. Just fill out the enquiry form in your own words, and we will put you in touch with the right people. Quickly and for free.
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