The Government has extended its mortgage guarantee scheme by a year, in a move that could enable more people with 5 per cent deposits to get on the property ladder.
Launched in April 2021, the scheme sees the Government provide lenders with a financial guarantee designed to encourage them to offer riskier 5 per cent deposit mortgages.
It can be used on houses worth up to £600,000 and will now run to December 2023.
It was initially introduced to help savers get onto the property ladder in the wake of the pandemic, when lenders were withdrawing their 95 per cent mortgage deals.
Given that the popular Help to Buy scheme closed for new applications in October, the mortgage guarantee scheme presents another possible avenue for first time buyers.
First time buyers: It is hoped the extension of the mortgage guarantee scheme will help more first time buyers get onto the property ladder
Chief Secretary to the Treasury, John Glen MP said: ‘For hard-working families facing today’s challenging economic conditions, it’s right that we continue to help them secure their first home or move into their dream house.
‘Extending this scheme means thousands more have the chance to benefit, and supports the market as we navigate through these difficult times.’
The scheme has, to date, been used by over 24,000 households. We explain how it works, the pros and cons and who might be able to take advantage.
Negative equity risk if house prices fall
First time buyers are currently facing some of the toughest conditions in recent years with an increase in mortgage rates amid an ongoing cost of living crisis and record-breaking rental costs.
Although most analysts expect house prices to fall next year by up to 10 per cent, one in five 18-45 year-olds still believe buying a house is unaffordable.
>> Check the latest mortgage rates for your deposit size using our tool
Mortgage brokers have welcomed the mortgage guarantee scheme extension, but also pointed out that it is not without its risks.
The small deposit size and the threat of a house price fall creates the risk of homeowners falling into negative equity where the balance outstanding on their mortgage is more than the value of their property.
Nationwide, Britain’s largest building society has predicted house prices will fall 5 per cent next year, and its forecast is conservative compared to others. Estate agency Savills has said it expects prices to fall by 10 per cent in 2023.
Earlier this month Nationwide’s latest house price index revealed house price growth slowed to just 4.4 per cent in the year to November, down from 7.2 per cent the month before. Between October and November house prices fell by almost £4,500.
Charlotte Nixon, mortgage expert at wealth management firm Quilter said: ‘If house prices do drop, then only having 5 per cent equity in a property does not leave the buyer with much equity to play with.
‘Homeowners who find themselves with negative equity will have an uphill struggle if they want to sell their homes.’
But Nixon also adds that the popularity of the scheme may rise regardless as first time buyers are anxious to find a way to become owners.
Some lenders have already removed 5 per cent deposit mortgages, and the Government scheme could encourage others to continue offering them.
In November, Virgin Money removed its 95 per cent mortgage deals from the market due to ‘market conditions’ amid forecasts of house price falls.
Justin Moy, managing director at broker EHF Mortgages said: ‘This will enable lenders to continue to offer mortgages to those with smaller deposits, with the additional risk covered by the Government rather than the lender itself.’
However, he said that they may not offer them on a two-year fixed term basis.
Moy added: ‘To cover the predicted bump in property values and the subdued market, it would be prudent for lenders to offer these 95 per cent mortgages on longer fixed terms, say 3-5 years, as that will hopefully cover any negative equity issues, so when the mortgage is ready for renewal, there is equity in the property.
‘This will also help with checking a borrower’s affordability. Even with a 95 per cent mortgage commitment, this will be a cheaper option than renting in many parts of the UK.’
First time buyers face a struggle to get on the property ladder as interest rates have shot up
Data shows that buyers are struggling to get mortgages approved with nearly a fifth (23 per cent) of potential borrowers having had their application rejected in the past 12 months, according to a study by specialist lender Together.
Digging into the figures, Together found 26 per cent of those planning to buy homes via Help to Buy or shared ownership had their application rejected, illustrating the demand for a scheme that supports this area of the market.
>> On the hunt for a home? The first-time buyer’s guide to getting a mortgage and climbing onto the property ladder
Currently average mortgage rates on 95 per cent loans are around 5 to 6 per cent for two-year fixed deals, and 5 per cent for five year fixed repayment deals.
For a £200,000 property Halifax has a two-year fixed deal at 5.60 per cent with a £1,099 fee and a five-year fixed deal at 5 per cent with the same fee.
Skipton Building Society has a five year fixed deal at 5.45 per cent with a £495 fee.
How does the mortgage guarantee scheme work?
The scheme works by the Government underwriting 95 per cent loans, allowing borrowers to buy a property up to £600,00 with only a 5 per cent deposit.
It provides lenders with the option to purchase a Government guarantee that compensates them for a portion of their losses if the house is repossessed.
The Government charges a commercial fee for the provision of this guarantee.
You can get a joint or single mortgage although it is likely to be a repayment deal rather than interest only.
Currently lenders including Halifax and Barclays offer mortgages under the guarantee scheme.
Natwest had offered the scheme from launch in 2021 to December this year but has since withdrawn. However, the lender has confirmed it is still offering 95 per cent mortgages.
Others still offer 5 per cent deposit mortgages outside of the scheme, and the difference for buyers will be minimal.
What are the pros and cons of the scheme?
The main benefit for buyers is that they don’t need to save as much for a deposit.
As with the now defunct Help to Buy, scheme buyers only need to stump up 5 per cent of their property price as a deposit in order to secure the property, rather than the more commonly-offered 10 per cent.
For example, if they are aiming to buy a property for £150,000 with a 95 per cent mortgage under the guarantee scheme, they would need to find £7,500 for a deposit – compared with £15,000 if they were buying with a standard 10 per cent deposit.
At a time when inflation is still in double digits and rents have hit record highs any reduction in the amount first time buyers need to spend will be welcome for savers.
However, the scheme does have limitations. Unlike other options for first time buyers such as shared ownership, the mortgage guarantee scheme cannot be used on new-build properties.
In addition, while the scheme can be used to move house – you do not necessarily have to be a first-time buyer – you cannot use it to buy a second home.
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