The new 5% mortgage guarantee; do you know how it works?

Governments new scheme to help people get mortgages.

In March 2021 as part of the budget the government announced a new 5% mortgage guarantee scheme. This scheme is designed to help people get a mortgage for house with as little as a 5% deposit. One of the biggest hurdles for many people to buying a house is getting together a deposit. Usually lenders like for people to have a 10% or 20% deposit. And this can be difficult for people to pull together. Especially as according to the Nationwide Building Society housing index the average house prices is £231,061*. This means a homebuyers may have to pull together over £20,000 pounds for a 10% deposit and £40,000 for a 20% deposit. This is often unachievable to some people or at least can seem so.

So how does the scheme work?

From April 2021 the new scheme will encourage lenders to provide a 5% mortgage option to homebuyers. It does this by guaranteeing the 5% mortgage for a portion of costs incurred if the homebuyer falls behind in their payments. Lenders have been cautious, due to the pandemic, to lend 95% of a house cost as these loans seem too risky. This scheme will help reduce the risk. The idea if it is less risky then lenders will offer it more readily.

This does mean that there is no direct benefit to the homebuyer, if you fall behind on payments on your mortgage, the lender can still repossess your house, it just means the lender has a portion of the costs guaranteed by the government. So the risks are lower.

Is every mortgage able to use this scheme?

No, only certain mortgages can be eligible to the scheme. First up, it is not just first time buyers, so do not get this confused with the help to buy, it is not the same thing. The main caveat for the mortgage to qualify is it can only be for purchases of houses up to £600,000. And the LTV or loan to value rate needs to be 91% to 95%. This means your deposit would potentially between 9%-5%.  This link is the government site for more information on the scheme.

So what does this mean for homebuyers?

The idea is to help people buy houses, or have the option to buy a house. If you are saving for a house, and you are looking at the £200,000 region and you have around £10,000; meaning you have 5% of the the house value. So before this scheme you would most likely have been refused a mortgage application. Now there is a possibility that you could apply for a mortgage and get the house you want sooner. All elements of having a mortgage still applies to you. You will still have repayments for the mortgage, there will still be an interest rate, you will still need a have credit checks, still need to have income checks etc. All it means is that lenders may offer mortgages at 5%.

So speak to someone you trust regarding the mortgage deals and what would work for you. It seem very appealing to get a house now, and that might be your best option. But it also might not be applicable, so make sure what you are getting is right for you and you have someone talk through everything. Understanding everything is key for you to make the right decision for you.

(Your house may be repossessed if repayments are not maintained)


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