Over the last decade, getting on the property ladder has become almost impossible for first-time buyers, with prospective buyers needing increasingly large deposits to buy their first home.
In the latest budget announcement this month, Chancellor Rishi Sunak announced plans for a new mortgage guarantee scheme to increase the availability of the mortgage products on offer to buyers, without having to save up a hefty deposit to become a homeowner.
The government scheme is due to open for applications in April and will run to December 2022.
How will the new scheme work?
Similarly to the 5% Help to Buy mortgage scheme which ran between 2013-2017, the government-backed mortgage scheme will mean that lenders taking part will offer a five-year fixed mortgage as part of the 95% mortgage offering.
The impact of the Coronavirus pandemic on the property market had previously seen 95% mortgages effectively disappear, leaving many would-be homeowners without the option to buy. This scheme aims to encourage more lenders to re-enter the market and for buyers with small deposits to be able to buy a home.
This scheme isn’t just for first-time buyers though, home movers and previous homeowners can also take advantage of the scheme.
What is a 95% mortgage?
In simple terms, a 95% mortgage is a loan for 95% of the property’s price, where the buyer will present a 5% deposit to cover the rest of the cost.
If you wanted to buy a house worth £190,000 with a 95% mortgage, you’d need to save a deposit of 5%, £9,500, and a lender would provide you with a loan for the remaining £180,000. Subject to lenders approval.
A 95% mortgage will operate as any other mortgage would for the buyer. There is little to no difference between a 95% mortgage arranged through this scheme and one offered outside of it.
However, there are some slight differences for the lender. Within this scheme, it is guaranteed that the government will cover some of the cost should the lender lose money. For example, if the buyer couldn’t keep up with payments and the property was repossessed, but the sale of the property didn’t cover the outstanding amount for the mortgage.
As the scheme has only recently been announced, the mortgage rates you can get with these 95% mortgages are yet to be disclosed, but several major banks and building societies have already signed up to the scheme, including Lloyds, NatWest, Barclays and HSBC.
Who is eligible for the 5% deposit scheme?
As we mentioned above, this scheme isn’t exclusive to first-time buyers, any prospective homeowner can access one of the government-backed mortgages, as long as the property will be used for a main place of residence. This means you can’t use the scheme to buy a holiday home, or a buy to let property.
There are some other eligibility criteria too:
- Alongside the property being your main place of residence, it must be £600,000 or less. Any properties that cost in excess of this amount won’t be eligible for the scheme.
- You must also be able to provide a deposit of between 5% and 9% of the property value, meaning the mortgage loan-to-value rate will be between 91% and 95%.
You’re unable to apply for an interest-only mortgage, the scheme only covers capital repayment mortgages.
You’ll also need to bear in mind that you’ll have to pass a lender’s normal mortgage affordability criteria to be able to apply.
How to Apply?
Details haven’t been released yet about how to apply for these mortgages, but it’s expected to follow the application process for a standard mortgage. It can be beneficial to speak to a mortgage broker about the best type of mortgage available to you, dependent on your current circumstances. Get in touch with the team today for free independent financial advice.
Your salary is a major factor for mortgage lenders, but there are several other things lenders will consider when checking your eligibility for the mortgage. Your full range of income, outgoings and any debt you have will be taken into account.
For example, if you are currently furloughed due to COVID-19, lenders will generally only take your furloughed income into consideration. They may be more flexible if you can provide a letter from your employer to say they’re covering 100% of your salary or you have a set return to work date.
Your finances will also be checked to see if you could still cover any mortgage payments if interest rates were to rise. Again, it’s worth chatting things through with a broker before committing to a lender.
Can you get help from your family to get a 95% mortgage?
If you have the option to ask your family for assistance to get on the property ladder, there are several ways they can help.
A member of your family could gift or loan you the money for a deposit. If the money is gifted to you, you’ll need to provide proof of this to the lender that you aren’t required to pay this back.
Be aware that some lenders can place a cap on what percentage of a deposit is gifted, so it’s worth researching or getting advice from a mortgage broker first.
An alternative option is for a family member to act as a guarantor for your mortgage, this can mean using their savings or property as collateral in the instance you miss a payment.
If you’re looking for your next home to rent or buy, let our team of property experts assist you, get in touch today.