New Mortgage Guarantee Scheme 2021
The new Mortgage Guarantee Scheme for 2021 following the Budget.
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What is the new Help to Buy Mortgage Guarantee Scheme for 2021?
The Chancellor Rishi Sunak announced during the 2021 Budget that there would be a new Mortgage Guarantee Scheme to support those who have a 5% deposit.
The scheme, which will start in April 2021, will be available on property purchases of up to £600,000 and will be available to both First Time Buyers and Home movers.
Importantly, the scheme won’t be restricted to new build properties, unlike the Help to Buy: Equity Loan Scheme.
How will it work?
You will need a personal deposit of just 5% of the value of your new home.
The Government will then guarantee a set amount of your Mortgage, should you default, thus reducing the direct risk to Mortgage Lenders.
You want to purchase a property for £200,000.
You will need a minimum personal deposit of £10,000 (5%).
The Government will then guarantee a percentage or set amount of your Mortgage, should you default on your repayments and the Lender have to take repossession. The Lender will then recoup monies, they would have lost, without the guarantee.
The Guarantee won’t affect you, it’s just an extra bit of security for the Mortgage Lender.
Like an Insurance policy, the Lender will pay a fee for each 95% Mortgage in the Scheme.
Why has this been bought in?
The new Scheme has been deemed as necessary by the Government, due to Mortgage Lenders halting almost all Lending to borrowers with 5% deposits.
The exception being to those who are purchasing a new Build Property through Help to Buy, and some Guarantor Mortgages.
The Government has said they want to turn generation rent into generation buy. And one way they can do this is be giving Mortgage Lenders confidence to return to 95% Mortgages.
Since the start of the Coronavirus pandemic, the number of High loan to value Mortgages available has plummeted.
As shown by the below graph, the number of High Loan to Value Mortgages went from 400 to almost none as the pandemic began.
The new scheme will replicate the previous Mortgage Guarantee Scheme.
The new Mortgage Guarantee Scheme is set to mirror the previous scheme which closed to applications in 2016.
This scheme was successful and directly helped more than 100,000 borrowers.
This is how the previous scheme worked, which ran from 2013 to 2016:
What Mortgage Lenders will offer 95% Mortgages through the new Mortgage Guarantee Scheme?
Mortgage Lenders already confirmed are:
Other Lenders are due to follow suit after April 2021.
How long will the new Mortgage Guarantee Scheme be open for?
The new Scheme is intended to be a temporary one.
Applications will be open from April 2021 until December 2022.
As we approach the December 2022 deadline, the Mortgage Guarantee Scheme is due to be reviewed, and if deemed necessary may be extended beyond this date.
However, if the Government feels the scheme has served it’s purpose, then it will likely be closed as expected.
What Mortgages will I be eligible for?
Mortgage Lenders are likely to bring out specific products for the new Scheme, similar to what many Lenders already do for the Help to Buy: Equity Loan Scheme.
We’re yet to know what the costs of these Mortgages will look like.
But we predict the interest rates will be between 3-4%.
There are likely to be fee free options, as well as fee paying options. Fee paying options will likely cost between £495 and £1,499.
Under the new Mortgage Guarantee schemes terms, Mortgage Lenders are required to offer long term Fixed Rate Mortgages of at least 5 years.
So we know there are likely to be 2 year fixed rate options as well as 5 year fixed rate Mortgages.
Is the new Scheme needed?
I suppose that depends on who you ask.
There are definitely positives and negatives for both sides though.
The housing market is still buoyant at the moment, without the need for 5% deposit Mortgages.
However, much of this demand has been put down to another Government measure; a freeze on the basic stamp duty levy’s.
The Government is clearly concerned that once this ends, the property market may be negatively impacted.
Doubters have suggested that the scheme will lead to a sharp increase in house prices.
However, if you ask first time buyers and renters, then their response to the scheme will no doubt be positive.
How will this affect the market?
We believe the market could be affected in two ways:
House Price Increases
A new Help to Buy Scheme, will naturally increase the number of people looking to buy. Demand usually leads to an increase in property prices.
Reduction in other Mortgage Rates
We believe that costs of Mortgages at 85% and 90% loan to value are likely to fall as a result of the Mortgage Guarantee Scheme.
The reason for this will be down to demand.
Once the new Scheme is introduced, demand will likely by high.
Those who have been sitting tight waiting with a 5% deposit are now finally able to buy a new Home.
And many of those which are making financial sacrifices to stretch to a 10-15% deposit are naturally going to stop doing so, if they can obtain a Mortgage with a lower deposit.
Positives of the Help to Buy Mortgage Guarantee Scheme
Helps Buyers onto the Ladder: The Mortgage Guarantee Scheme will help those on to the property ladder which are currently struggling or unable to.
May reduce Mortgage Rates: As mentioned above, the scheme may result in a reduction to costs on other Mortgages, for those which have a higher deposit.
Helps the economy: As shown by the financial crisis of 2008, the economy is heavily reliant on the stability of the property market. People being able to buy, helps keep the economy going.
Negatives of the Help to Buy Mortgage Guarantee Scheme
Increase in property prices: As above, the main disadvantage could be a sharp increase in property prices.
More people buying generally leads to higher property prices. Especially if there are many more buyers than there are sellers.
Negative equity: The smaller the deposit you have, the greater risk you have of falling into negative equity.
This is where the value of your Mortgage exceeds the value of your property.
Alternatives to the new 95% Mortgage Guarantee Scheme
There are of course other options if for any reason you didn’t want to purchase your new home through the new Mortgage Guarantee Scheme.
The main alternative is the Help to Buy: Equity Loan Scheme.
Available only on New Build properties, you are able to put down a minimum deposit of 5%. And then take out a Government backed Equity Loan of 20%.
You can then use the equity loan to boost your deposit, meaning you are eligible for a cheaper Mortgage than you would be ordinarily, with a 5% deposit.
How much will I be able to borrow?
Mortgage Lenders will assess your borrowing capacity in the same way as they usually would, by assessing your Income and your Outgoings.
Your maximum borrowing will usually be capped at 4 to 4.5 times your income on Mortgages at 95%.
To get a rough idea of what you may be able to borrow and what is taken into account. Check our post out on this here.
What Mortgage Repayment options will I have?
A Capital and Interest Repayment Mortgage will likely be the only option available to you.
A Capital & Interest Repayment: This is where you repay your Mortgage balance as well as the interest to the Mortgage Lender.
Providing you keep up with repayments you are guaranteed to have repaid your Mortgage by the end of the term.
The other usual option is Interest Only.
This is unlikely to be an option, as Mortgage Lenders consider Interest Only to be a much higher risk to borrowers than a repayment Mortgage is.
What types of Mortgages will be available?
The main types of Mortgages that will be available on the Help to Buy Mortgage Guarantee Scheme will be:
Fixed Rate Mortgage: Simply put, this is where your Mortgage is fixed for a certain period of time, usually for 2 to 5 years.
The rate is best to be thought as fixed for you and the Lender.
As during this time your interest rate is guaranteed not to change. And you are unable to leave the Mortgage early without paying a fee to the lender for doing so.
Variable Rate Mortgages: Where your interest rate can vary. You will usually have a set interest rate which can fluctuate throughout the term.
The interest rate will usually change in line with the Bank of England base rate, although it doesn’t have to.
Tracker Mortgages: Where your interest rate will track a certain index, usually the Bank of England Base rate.
When the Base rate changes, so will your Mortgage rate.
What documentation will I need to provide the Mortgage Lenders?
What documentation is required for the Mortgage, will vary between Lenders.
Mortgage Lenders will usually need to verify your identity, as well as your income and outgoings.
To do this they will require the following:
Payslips or Accounts/Tax Calculations for any Self Employed Earnings
Bank Statements to evidence Earnings and Outgoings
Identification to prove your Name and Address.
What costs will I need to consider?
Lenders Arrangement/Product fees: A fee the lender will charge for arranging your Mortgage.
In general, the higher the Arrangement fee the lower, the Interest rate.
Most, if not all lenders, will also provide a low/no fee option and charge a slightly higher rate as a result. These fees tend to be between 0-£999.
Broker fees: this will depend on how complex your case is. For example, whether you have any adverse credit.
To find out exactly what it could cost, get in touch with on of our Mortgage Brokers for a free non-obligatory quotation.
Solicitors fees: for an ordinary house purchase, you can expect to pay anywhere between £1,000 and £1,500, so its important to shop around.
Always check out their Reviews before choosing a Solicitor. They’re a very important cog in the house buying process.
Stamp Duty: If you are a first time buyer in England, it is unlikely you will pay stamp duty if your property is valued less than £500,000.
For non first time buyers, Stamp duty will be due on properties worth over £125,000.
Mortgage Valuation: The Mortgage Lender may charge a fee to complete a basic valuation on your property during the application process.
This will be between 0-£250. But could be more if you need to use a specialist lender, if you have adverse credit for example.
Survey fees: You may choose to carry out a more thorough assessment on your property.
The most common, being a Homebuyers report, which will cost between £300-£500.
Full Structural report, if needed, will cost in excess of £600, however these are rarely necessary.
Our Mortgage Brokers
We work with a variety of Mortgage Brokers which each specialise in different Mortgage Advice areas.
When you get in touch, simply select the reason why you’re getting in touch i.e. First time buyer, Bad Credit, Remortgage etc. And we will match you to the Mortgage Broker which Specialises in your circumstances.
All of the Mortgage Brokers we work with are whole of market, FCA regulated, CeMap qualified and have consistently great reviews.
Get in touch for a free non-obligatory conversation with one of our Specialist Mortgage Advisors for further information on how they can help you.
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