We’ve received a lot of questions recently asking what exactly the government’s new mortgage guarantee scheme is and who it is available to. To help anybody with the same question, here are all of the key details.
There is some confusion for many people who think the mortgage guarantee scheme is exactly what it says on the tin, a guarantee from the government that, if someone wants a mortgage, they can have it.
Sadly, it’s not quite this generous. The mortgage guarantee scheme is more commonly being referred to as government-backed 95% LTV mortgages in consumer-facing media.
The scheme sees the government offer guarantees to high street mortgage lenders who provide mortgages to people who only have a 5% deposit.
For a long time, if a buyer has had anything less than a 10% deposit, they’ve had no chance of securing a mortgage. This scheme is designed to change that and help more people get a foot on the ladder.
Historically, lenders are often reluctant to lend 95% mortgages because the risk is considered to be too high – if a buyer can only afford a 5% deposit, the lenders see a higher risk that they won’t be able to keep up with the monthly mortgage repayments.
Therefore, the ‘guarantee’ part of ‘mortgage guarantee scheme’ is being made by the government to the lenders.
The guarantee says that, if a lender is willing to provide a 95% mortgage, the government will compensate the lender should a borrower fail to pay back the mortgage as agreed.
However, to avoid incentivising lenders to give mortgages to people they know cannot afford them (which is exactly what caused the global crash in 2007), the lenders will still be responsible for 5% of any losses that result if the borrower cannot pay off the mortgage.
After 7 years of successful mortgage payments, the government’s guarantee stops. This is because data shows that, after seven years of regular payments, it’s highly unlikely that things will go wrong.
Will the mortgage guarantee scheme always be available?
No, it’s only intended to be a temporary scheme. As it stands, it is scheduled to end in December 2022, so you’ll need to move quickly if you want to take advantage.
But, just because the government removes its guarantee in December 2022, it doesn’t mean lenders will stop offering 95% mortgages. It’s most likely that some lenders will continue to provide them (if the economy isn’t in crisis) after the deadline, while others will remove the offer.
Having said that, there’s always a chance that the scheme will end up being extended beyond the current deadline.
Am I eligible for the mortgage guarantee scheme?
Technically, the scheme is targeted at lenders, not borrowers. But borrowers benefit from the 95% mortgages that those lenders can then provide.
So the question should be, am I eligible for a 95% LTV mortgage?
The government says 95% mortgages are for people who can only afford a 5% deposit. But simply having enough cash for a 5% deposit does not necessarily mean you’ll be approved for a mortgage.
Lenders will still analyse your income and outgoings, your employment status, and so on. If, for example, you are self-employed, you’re still going to have to jump through more hoops than someone on PAYE.
95% mortgages are now on offer from Lloyds, Santander, Barclays, HSBC and NatWest. More lenders will join the scheme soon.