THE CORONAVIRUS
(COVID-19) pandemic led to a reduction in the availability of high loan-to-value (LTV) mortgage products, particularly for prospective homebuyers with only a 5% deposit with the help of the mortgage guarantee scheme. This has resulted in many households being unable to get onto the housing ladder. Access to finance and affordability play a key role in the ability for people to purchase their dream home.
The launch of the new mortgage guarantee scheme will enable more households to access mortgages, without the need for prohibitively large deposits. The scheme is intended as a temporary measure.
ELIGIBILITY FOR NEW MORTGAGES
It opened for new mortgage applications from April 2021 and will run to December 2022, in line with the government’s view that the current scarcity of high loan-to-value lending is primarily a response to the pandemic rather than a symptom of a longer-term structural change in the mortgage market. The government will review the continuing need for the scheme towards the planned end date, and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective homeowners.
Lenders tend to think that 95% mortgages are risky because, if house prices were to fall, the homebuyer could end up owing more than their home is worth
STIMULATE THE HOUSING MARKET
The mortgage guarantee scheme is a government initiative to encourage lenders to reintroduce their 95% mortgages and stimulate the housing market. Instead of lenders taking on all of the risks of offering such large mortgages, the government will shoulder some of the risk. Specifically, the government will guarantee the portion of the loan above 80%.
A 95% mortgage is, simply, a loan a homebuyer can take out which covers 95% of the value of their chosen property. The buyer, therefore, only needs a 5% deposit. These mortgages are often favoured by first-time buyers, who might struggle to save a deposit of more than 5%. However, 95% mortgages aren’t always easily available, particularly in times when the economic outlook is uncertain.
FAILURE TO MAKE THE REPAYMENTS
Lenders tend to think that 95% mortgages are risky because, if house prices were to fall, the homebuyer could end up owing more than their home is worth. If they fail to make the repayments and their home is repossessed, the lender may not be able to recoup the total loan by selling the property. So, when the economic outlook is uncertain, many lenders choose to withdraw their 95% mortgages to avoid this risk. We saw this happen last year, due to the COVID-19 pandemic outbreak.
PORTION OF THE MORTGAGE OVER 80%GUARANTEED
Here’s a simplified example: If a borrower buys a home for £100,000 with a 95% mortgage, and fails to make any repayments, the home could be repossessed. Without
the government guarantee, the lender would need to recover the £95,000 they had provided, which they may not be able to do by selling the property. Under the terms of the scheme, the government guarantees the portion of the mortgage over 80% (so, with a 95% mortgage, the remaining 15%). With the guarantee, in this example the government would compensate the lender with £15,000, meaning they’d only need to recover £80,000 by selling the property.
WHAT PROPERTY PURCHASES ARE NOT GUARANTEED?
The mortgage guarantee scheme doesn’t cover all mortgages. The scheme
includes loans on properties up to the value of £600,000 and only includes properties the buyer intends to live in, not buy-to-let properties or second homes. It also only applies to mortgages that are over 90%, where a five-year fixed rate is offered. The scheme is available to any buyer, not just first-time buyers, though it’s likely to be mostly first-time buyers who will benefit.
