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Mortgage guarantee scheme: here’s what you need to know

Mortgage guarantee scheme: here’s what you need to know
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Getting on the property ladder has historically been a challenge in England. Now, during the pandemic, it is that much harder. The number of 95% loan-to-value (LTV) mortgages available has dropped from hundreds at the start of 2020 to single-digits right now. As a result, the government is set to announce in the Budget a mortgage guarantee scheme designed to help those struggling to buy a home.

What is the mortgage guarantee scheme?

The mortgage guarantee scheme is the government’s latest initiative aimed at helping people get onto, or move up, the property ladder.

Available from April 2021, it will allow buyers to obtain a mortgage with only a 5% deposit. It’s something that has been sorely missed from the market since the coronavirus pandemic began.

When the economic outlook worsened, banks and building societies withdrew a lot of their riskier higher LTV mortgages. Basically, they wanted buyers to have larger deposits in order to minimise their exposure while the economy was struggling.

The Treasury is now stepping in and saying it will guarantee a portion of loans on homes in England with a value of up to £600,000. The aim is to encourage lenders to begin providing 95% LTV mortgages once again.

And the good news is that the scheme will be open to existing homeowners, as well as first-time buyers. The only limit is the £600,000 cap on the value of the property.

What impact will it have?

Prime Minister Boris Johnson says the mortgage guarantee scheme is there to help ‘generation rent to become generation buy’.

First-time buyers have historically struggled to enter the housing market, largely because saving a big enough deposit while paying rent is challenging. With the disappearance of 95% LTV mortgages, this became even trickier.

By adding a safety net for lenders in the form of the mortgage guarantee scheme, the government has opened up the market to a new tranche of buyers.

As a result, house prices are likely to continue to rise. It’s the basics of economics, more demand plus the same amount of supply, equals higher prices. House prices were already on the up as a result of the stamp duty holiday. And this latest scheme will only continue that trend.

How do you use the scheme?

Unlike initiatives such as the Help To Buy: Equity Loan scheme, the mortgage guarantee scheme is more for lenders than buyers.

As a buyer, all you will need to do is look out for 5% deposit mortgages provided by lenders who have accessed the scheme. They should be on the market in April.

In the meantime, something you could do is get your personal finances in shape. While you won’t need as big a deposit, the mortgage will still be subject to affordability checks.

So it may be a good idea to check the state of your credit score. And if you have any credit card debt, you could look to pay off as much as you can.

Finally, if you need somewhere to house your deposit, an easy access savings account is one option that will allow you to withdraw your balance easily when the time is right.

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