Mortgage Guarantee Scheme Extended to 2023
The UK government has announced the extension of the Mortgage Guarantee Scheme until December 2023. But what is it and how can you apply for it?
This in depth guide outlines everything about the Mortgage Guarantee Scheme including the advantages and disadvantages. We also explain how to apply for it and discover if there are other schemes you can take advantage of.
Let’s explore this further.
What is the Mortgage Guarantee Scheme?
The Mortgage Guarantee Scheme is a government scheme designed to help people buy a property with a 5% deposit.
There are three major issues people face when buying a property:
- Passing a lender’s affordability calculation
- Passing a credit check
- Having enough deposit to put down as security against the mortgage
The Mortgage Guarantee Scheme addresses the deposit issue and the government backs lenders so they can provide 95% loan to value mortgages.
In short, the scheme is a guarantee for lenders and allows them to offer 95% mortgages which are typically much riskier than mortgages with higher deposit amounts.
How Does the Mortgage Guarantee Scheme Work?
The scheme works in a fairly simple way if you are a borrower. You save the 5% deposit required for your mortgage and approach a lender who is a participant in the scheme.
For lenders, there are additional requirements to participate including detailed submissions to the treasury and auditing – but this isn’t applicable for borrowers. A lender will also need to purchase the guarantee from the government.
Once you are approved for your mortgage, the lender applies to the government for a deed of guarantee. If the lender meets the governments strict requirements and the loan falls within the scheme’s remit, the government will issue a deed of guarantee.
The Mortgage Guarantee Scheme is broad and used regularly across the mortgage industry. It has now been extended to incorporate home purchase plans as well.
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Who Can Get a 95% ‘Guaranteed’ Mortgage?
Anyone can get a 95% guaranteed mortgage in theory, in practice it is not as straightforward.
A lender has to pay for the mortgage guarantee and not all lenders subscribe to the scheme.
Lenders who do subscribe to the scheme tend to have higher interest rates on their high loan to value mortgages which can be prohibitive for those with tight monthly budgets. You will normally find a 10% deposit mortgage product from the same lender has a cheaper interest rate.
The mortgage lender will also need to provide your personal information to the government. This information can include anything you have supplied to your mortgage broker and lender such as income, the type of property and who is party to the mortgage.
It is important that you declare information on your mortgage accurately. Lastly, affordability calculations will be harder to pass on a 95% loan to value mortgage because the amount you are borrowing is higher.
How Do I Apply for a Guaranteed Mortgage?
You do not need to personally apply for a mortgage using the Mortgage Guarantee Scheme.
If the lender wants to protect a 95% loan to value mortgage, they can opt to purchase the guarantee. A lender will outline whether or not they intend to buy a guarantee and you will then provide consent (because your personal data will be shared).
Consenting allows the lender to protect the mortgage they have offered you and some lenders offering a 5% deposit mortgage will only do so on the proviso they can guarantee it using the scheme.
This means you could be declined for your mortgage if you do not accept the lender using the Mortgage Guarantee Scheme.
To apply for a mortgage using the Mortgage Guarantee Scheme there are 3 criteria to meet:
- The property must be your primary residence
- The mortgage must be a repayment mortgage
- Have a deposit between 5% and 9.99%
Exclusions for the Mortgage Guarantee Scheme
There are a few exclusions to the Mortgage Guarantee Scheme, and you won’t be able to use the scheme for:
- Buying a new build property
- Buying a second home
- Buying a Buy to Let property
- Buying commercial property
- When using an interest-only mortgage
What You Need to Provide for a Mortgage Guarantee Scheme Mortgage
When applying for your mortgage you will need to provide proof of your deposit. The deposit can be gifted from a relative providing they sign a document accepting that the money is gifted.
You will need to provide income evidence such as payslips (or your Tax Calculations and Tax Year Overviews if you are self-employed).
When using a whole of market mortgage broker, they can ascertain the most suitable lender for your circumstances based on how much you can borrow. For example, most lenders allow you to borrow up to 4.5 times your annual salary. However, there are lenders who may allow you to borrow 5 times your salary.
You should inform your broker during the initial consultation if you wish to use the Mortgage Guarantee Scheme as they will be able to source lenders who allow 95% loan to value products and use the scheme.
You will also need to ensure your credit score meets your chosen lender’s requirements.
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Alternatives to the Mortgage Guarantee Scheme
There is an alternative government scheme available but it may not be applicable to you depending on your circumstances.
- First Homes Early Delivery Program – a scheme for first time buyers
looking for local housing.
The First Home Early Delivery Program is operated using the property developers and you will need apply through your chosen property developer. Unfortunately, the Help to Buy Equity Loan Scheme that was previously offered by the government is no longer taking new applications.
Speak to a Specialist
Finding the best mortgage product is complicated at the best of times. It can be even more difficult if you have a low deposit amount or want to use a government scheme.
Most government schemes will request a Decision in Principle (known as an Agreement in Principle on government application forms) before you can proceed to a scheme application.
Need advice on the best mortgage solution for you? We provide fee free advice including recommendations around government schemes. Contact us to book your initial consultation today.