FREE 95% Mortgage Guarantee Scheme Advice
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Jonathan Smith – (CeMAP, BA Hons, Aff SWW, CeRER)
The 95% mortgage guarantee scheme is a government-backed scheme that was launched in April 2021. This was as a response to the sudden lack of low-deposit mortgages available when the coronavirus pandemic began. It aims to help first-time buyers get onto the property ladder and allow current homeowners to move onwards with just a 5% deposit.
Available across the UK, this scheme applies to properties priced up to £600,000. It will run until the end of June 2025. Borrowers need to pass the standard affordability checks carried out by lenders and must take out a fixed-rate repayment mortgage. Here, we’ll explain what the 95% mortgage guarantee scheme entails, any issues you should be aware of and how to apply for it.
What is the mortgage guarantee scheme?
This scheme is designed to help buyers afford a home with a small deposit of 5%. Saving a substantial deposit is a stumbling block for many prospective buyers so this scheme offers a helping hand. Rather than having to save a hefty deposit amount that is usually required by lenders, this smaller amount makes it easier for first-time buyers to afford a home or for existing homeowners to move to a new home when they have little equity in their current one.
As this scheme is government-backed, lenders are encouraged to make more 95% mortgages available. Mortgage applications for this scheme can be accepted by lenders until 30th June 2025.
How does the mortgage guarantee scheme work?
With this scheme, you can borrow 95% of the property’s value so that you only need to save a 5% deposit. You apply for your mortgage in the same way as you would for any standard residential mortgage. Depending on your affordability and the lender’s terms, you can buy a property valued at up to £600,000. To take advantage of this scheme, you need to take out a fixed-rate mortgage on a repayment basis. Once your mortgage starts, you need to make monthly repayments, which will gradually decrease the mortgage balance owed.
The difference with how this scheme works is for lenders rather than borrowers. To persuade lenders to offer more low-deposit mortgages, the government guarantees the portion of the mortgage loan that’s over 80%. As you have to pay a 5% deposit, this guarantees the remaining 15%.
This means that if you default on your mortgage payments and your property has to be repossessed, the government shares some of the burden with the lender so that they are partially compensated for their losses. As this arrangement reduces the risk for lenders, it gives them the confidence to offer 95% mortgages as a result.
Get in touch with our mortgage experts
At Trinity Finance, we have extensive dealings with the lenders participating in this scheme. One of the scheme’s terms is that the lenders have to offer a 5-year fixed rate mortgage in their range of deals. This gives you the security of knowing exactly what you have to pay each month during that period. Each lender will also offer alternative deals for fixed rate mortgages and our mortgage brokers in Kent, London and Edinburgh can help you decide which best fits your needs.
Speak with one of our friendly mortgage advisers on 01322 907 000 for more information. Alternatively, send an enquiry to us at info@trinityfinance.co.uk or via our contact form and we will reply to you as quickly as possible.
The need for this 5% deposit scheme
At the beginning of the coronavirus pandemic, the majority of low-deposit mortgages were suddenly withdrawn from the market. This resulted in a minimum deposit requirement of 15% or 20% of a property’s value from most lenders. Such a high amount made obtaining a mortgage extremely difficult for many people hoping to buy a property.
The government’s main focus with this scheme is to help younger first-time buyers get onto the property ladder. Many are either living at home or in rented accommodation with no way to proceed with a mortgage deal. They are faced with high property prices, a hefty deposit requirement and stricter lending criteria. Paying high rents in the current climate also makes it hard to save a deposit, which is made even more difficult with the low interest rates on savings accounts.
These combined factors have led to a generation of renters who cannot get mortgages even though they can afford the monthly repayments. By removing the obstacle of saving a high deposit, the government hopes this scheme can help to turn ‘generation rent’ into ‘generation buy’.
As mentioned earlier, it’s not just first-time buyers who can benefit from this 5% deposit scheme. Many homeowners can’t afford to move home without a 95% mortgage. Being able to secure a deal under this scheme allows those who have previously been stuck where they are to move up the property ladder. This keeps the housing market moving and frees up more homes that can also cater to the increased demand from first-time buyers.
Eligibility criteria for the mortgage guarantee scheme
To be eligible for this scheme, you need to:
- Be a first-time buyer or current homeowner
- Use the property as your main residence
- Pay a 5% deposit
- Take out a repayment mortgage with a fixed rate
- Pass the lender’s affordability checks
As the government guarantees the portion of the loan between 80% and 95%, lenders accept a deposit of between 5% and 9.99%. The mortgage must be used for your home, which means you cannot buy a property to use as a second home, as a buy-to-let investment or as a commercial property. Some lenders won’t agree to a mortgage via this scheme for new-build properties. You also cannot have an interest-only mortgage deal.
When applying for your mortgage, you still need to go through the lender’s normal affordability checks to ensure that you can comfortably afford the monthly repayments. This scheme allows you to buy up to a value of £600,000 but this depends on the lender’s criteria. Some lenders set lower limits and may have different limits for houses and flats.
Benefits and drawbacks of the mortgage guarantee scheme
The main benefit of using this scheme is that you only need a 5% deposit. This makes it easier for you to buy a property if you’re struggling to save a higher amount. This scheme isn’t restricted to first-time buyers — if you already own a home but want to move, this helps you do that.
Paying a small deposit, however, means that you’re more likely to pay a higher interest rate. This will increase your monthly payments and make your mortgage more expensive overall compared with paying a bigger deposit. You’re also at more risk of negative equity. This is when the value of your property falls below the amount left owing on your mortgage. When your initial fixed-rate deal ends, you may find it difficult to remortgage, with no choice but to be put on your lender’s standard variable rate (SVR). The SVR will be higher than the initial fixed rate. You may also struggle to sell your property, being unable to achieve a sale price that covers your outstanding mortgage, let alone leave you with any profit.
When is the 95% mortgage guarantee scheme available until?
Originally, the scheme was only set to run until 31st December 2022 but this deadline was extended to 31st December 2023. Then, during the Autumn Statement 2023, it was announced that a new extension would be made. Mortgage applications can now be submitted under this scheme until 30th June 2025.
How to apply for the mortgage guarantee scheme
You don’t apply directly for this scheme — you simply search for a mortgage as normal, with a focus on mortgage deals that have a low deposit requirement. If you find a mortgage deal through a lender who has taken advantage of the extra security offered by the government, it will fall under this scheme.
Therefore, to find a low-deposit mortgage, simply contact us on 01322 907 000 and our qualified mortgage brokers will search for the best deal for you. We will ascertain how much you can borrow and check whether this type of mortgage is the most suitable one for your circumstances. With unrestricted access to the market, we may be able to find better options that you may not have been aware of.
Alternatives to the mortgage guarantee scheme
There are other options to consider when having a low deposit is your main concern for buying a home. We’ve detailed some of them below.
- First Homes scheme: This government scheme provides first-time buyers with a discount of at least 30% on the price of new-build properties. The First Homes scheme is available in England and you need to pay a minimum deposit of 5%. You also need to secure a mortgage for at least 50% of the purchase price.
- Deposit Unlock: Available to first-time buyers and existing homeowners, Deposit Unlock enables you to buy a new-build home with a 5% deposit. As a collaboration between the home building industry and lenders, it removes some of the obstacles typically faced when trying to buy a new build. Buyers are provided with a low-deposit mortgage option and lenders are paid mortgage insurance to reduce their risk in exchange for offering 95% mortgages.
- Shared ownership: Shared ownership is a compromise between buying and renting. You buy a share of a property – usually between 25% and 75% – and pay rent at a discounted rate for the remaining share. The deposit requirement is a minimum of 5% of your share of the property and you need to meet the scheme’s criteria to be eligible.
- Guarantor mortgage: With a guarantor mortgage, a family member or possibly even a close friend agrees to be your guarantor. This means that they accept legal responsibility to pay your rent if you’re unable to. They won’t be named on the property deeds so you have full ownership of your home. Having a guarantor makes home ownership more accessible if you have a low income, low or no deposit, a bad credit rating or no credit history at all.
Considerations before using the mortgage guarantee scheme
Whilst the government has set a property price cap of £600,000 for this scheme, some lenders have set their own lower price caps. The government has also advised that this scheme applies to new-build properties as well as existing ones. Some lenders, however, won’t agree to provide a loan under this scheme for a newly built property. Our mortgage brokers know which lenders have set lower price caps and which ones will only agree to 95% mortgages for existing properties. We can liaise with the right lenders on your behalf to ensure your mortgage needs are met.
You don’t have to pay a fee to be part of this scheme but some lenders will charge you a mortgage arrangement fee. We will advise you of any fees that are payable for different mortgage deals before you make a decision.
As your mortgage has such a high loan-to-value (LTV) ratio, which refers to the percentage of the property’s value that you want to borrow, you can expect to pay much higher interest rates than if you had a deposit of 10%, for example. A bigger deposit opens up more mortgage options as well as providing you with lower rates, helping to keep your monthly repayments lower.
Our mortgage brokers have access to all of the deals offered by lenders participating in this scheme, including deals that are not offered publicly. We can search for the best 95% LTV mortgage deal to meet your requirements, taking into account the rates and any applicable fees.
Another point to bear in mind is that having such a high LTV ratio puts you at risk of being in negative equity in the future. This means that if your property’s value drops, it may be lower than the amount you owe for your mortgage.
We can arrange your low-deposit mortgage
Only having to provide a 5% deposit can be the break you need to either step on the first rung of the property ladder or move further up it. It can still be hard to save this amount, though. Our mortgage advisers, located throughout Kent, London and Edinburgh, can advise you on ways to boost your deposit, such as saving with a Lifetime ISA, or how to get help if you’re struggling to save one at all, such as using a gifted deposit or applying for a guarantor mortgage.
If you have managed to save more than 5% for your deposit, it may be in your interest to postpone your plans to buy until you can increase the amount to 10%. A 90% LTV will provide you with more mortgage options and considerably cheaper rates than opting for a 95% LTV mortgage.
There are also other government-backed schemes that can help you obtain a mortgage with a low deposit. These include the First Homes scheme and the shared ownership scheme. Our mortgage experts can give you impartial advice on these, discussing the pros and cons of each so that you can make an informed decision about which mortgage route to take.
Give us a call on 01322 907 000 to find out exactly what your options are. If you prefer, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form and one of our mortgage consultants will reply to you as quickly as possible with more information.
FAQs
Are mortgage rates higher for a 95% mortgage?
Yes, higher interest rates are usually charged for smaller deposits. This means that you’ll be charged more when paying a 5% deposit than you would if you paid a 10% deposit. This is because you’re borrowing 95% of the property’s value compared with 90%, which increases the risk for the lender. If you’ve saved more than 5% for your deposit, it may be better to wait until you can reach 10% as this will give you access to deals with cheaper rates.
One stipulation for this government mortgage guarantee scheme is that lenders must offer a 5-year fixed-rate deal as one of their options. The interest rate is fixed throughout that period, giving you security that it won’t fluctuate and peace of mind that your monthly payments will remain the same until the end of the fixed term.
How long is the 95% mortgage guarantee scheme available for?
The mortgage guarantee scheme has been extended and will continue to run until 30th June 2025.
Can you buy a new-build property using this scheme?
Under this scheme, you can buy any property type, whether it’s a new build or an older property. However, some lenders won’t approve a 95% mortgage for a new-build property. This is because new builds don’t hold their value, which increases the risk for lenders.
Are there risks to having a 95% mortgage?
By paying a 5% deposit, you’re at more risk of going into negative equity than if you paid a bigger deposit. Being in negative equity means that your property’s value has dropped lower than the outstanding balance for your mortgage. The more you can pay, therefore, the bigger the cushion you have against going into negative equity should your property’s value fall.
However, mortgages obtained via this scheme must be on a repayment basis. This means that you’ll gradually pay off some of your mortgage balance each month, increasing your equity in your home as you do so.
It can also be harder to remortgage when you have such a high loan-to-value (LTV) ratio. It’s unlikely that new lenders will offer a more competitive rate until the LTV ratio is lower, such as 90% instead of 95%
Is it better to save a bigger deposit?
Saving a bigger deposit can be beneficial to you in various ways. First, you’ll be offered better interest rates from lenders than you will for a smaller deposit. When paying a low deposit of 5%, lenders charge more as compensation for the extra risk they’re taking. The higher interest rate means that you’ll not only pay more for your monthly mortgage payments but your mortgage will cost you more in the long run.
When paying a bigger deposit, such as 10%, you’re borrowing less and, therefore, reducing the risk for lenders. As such, more deals will become available to you and lenders can offer you a better interest rate. Also, as you’re borrowing a smaller amount, it makes it easier to pass a lender’s affordability checks for a mortgage.
Can you use this scheme to invest in a buy-to-let property?
No, this scheme is to help buyers afford a home and, as such, the property you buy must be used as your main residence. This means that you can’t use it to purchase a buy-to-let property or a second home.