The new government-backed 95% mortgage guarantee scheme launched on 19 April 2021. The scheme has already attracted criticism, with detractors arguing that the scheme does not go far enough. So will the scheme offer genuine assistance to buyers that need it most, or is it a lame duck?
How does the 95% mortgage scheme work?
Mortgage lenders became understandably risk averse during the COVID-19 pandemic. The availability of 95% Loan to Value (LTV) mortgages all but dried up during the period.
The new government-backed guarantee is designed to give lenders the necessary confidence they need to start offering 95% LTV mortgage products again. The guarantee will compensate lenders for a portion of any net loss suffered if a property has to be repossessed.
The scheme should help both first time buyers and existing homeowners, to buy a (main residence) home for up to £600,000 with a 95% mortgage. Sole and joint buyers can apply. The scheme is available on repayment mortgages only and cannot be used to purchase new build properties.
As with any mortgage, you will still be responsible for making repayments and you will still need to pass the lender’s affordability checks.
The scheme will be available until December 2022 – unless the treasury’s allocated scheme limit of £3,900,000,000 is exceeded first.
Will the scheme help me buy a home?
In the weeks following the launch of the scheme, some commentators in the press were quick to point out that typical first time buyers with a UK median wage would not be able to afford to buy in around half of local authority areas.
More recently, however, research carried out by Quittance shows that, compared to many other parts of the country, buyers on an average household income for Denbighshire can afford to buy an average price property in Prestatyn, Abergele and Rhyl with a 95% mortgage.
For the research, an “average household income” assumes a property is being purchased by two people on the median annual salary in Denbighshire. Quittance used the latest HM Land Registry data to calculate the average price for homes bought in each town.
To calculate affordability, Quittance assumed 5% of the average property price would be supplied by the buyer as a deposit. A 4.5 multiple was applied to the average household income to determine if this figure was greater than the 95% of the property price required for a mortgage.
The average household income for Denbighshire is £42,076. Based on that figure, the maximum affordable mortgage for two people with that joint income is £189,342 (£42,076 x 4.5). This maximum mortgage affordability is greater than a 95% mortgage required to buy an average-priced property in several local areas, including Rhyl (£195,912).
For Flintshire buyers with the area’s average household income of £46,778, Prestatyn’s average property price of £205,100 is similarly affordable. The average property price for Abergele (£202,335), was also less than the maximum affordability for Conwy buyers, based on an average household income of £45,608.
Do all lenders offer the scheme?
Mortgage lenders are not obliged by the government to offer the scheme.
At the commencement of the scheme, major lenders including Barclays, HSBC, NatWest and Santander announced their participation. Other lenders are expected to follow.
Some lenders actually stole the march and started offering 95% mortgages in late March and early April. Other lenders, such as Nationwide will not be participating and have instead increased the mortgage income multiplier from 4.5 to 5.5.
The terms of the guarantee mean that lenders have to pay a commercial fee (calculated as a percentage of the loan) to the Treasury. Lenders will either have to absorb this cost or pass it on to the borrower in the form of increased interest rates.
With post-lockdown confidence increasing, many lenders have decided to accept the higher level of risk, without the added cost of the commercial fee, as it enables them to offer a more competitive interest rate.
To be able to offer the scheme, lenders also have to offer a 5-year fixed rate product as part of their 95% LTV range. Many lenders are not keen on this, as base interest rates may go up within the next 5 years.
How do I apply?
Once you have identified a mortgage product and lender, you can apply directly to the lender in the same way as applying for a normal mortgage. If you are using a broker, they will also be able to assist.
Should I buy with a government-backed mortgage?
You should certainly consider it. The mortgage market is dynamic and you may find that a government-backed guaranteed mortgage offers the best value at the time of application. From a buyer’s perspective, there is really no downside to this route.
However, you should still be prepared to look at deals outside of the scheme. At the time of writing, more than half of the 95% deals on offer sit outside the mortgage guarantee scheme. Mortgages outside the scheme may have lower rates.
If you can afford a larger deposit, there may be better alternatives. A 5% deposit may seem attractive initially, but higher interest rates will cost you more in the long run.
For first time buyers, Help to Buy equity loans are also still available, covering 20% of a property’s purchase price. Buyers can then pay a 5% deposit with the remaining 75% being covered by a Help to Buy mortgage.