Many first time buyers are yet to get onto the property market due to the rising price of property. This increase in price necessitates higher deposits to be able to secure 20-25% of the property. Throughout the COVID-19 pandemic and it’s aftermath, lenders have felt less secure in providing lower ‘loan to value’ mortgages, due to the instability among the economy. To tackle this, the UK government have developed a scheme to help first time buyers get on the market and provide mortgage lenders with financial security. The mortgage guarantee scheme was announced by the UK government in March 2021. It’s overall goal is to increase the availability of 95% mortgages and provide first time buyers with access to the property market.
What is The Mortgage Guarantee Scheme?
The government guarantees scheme ensures the availability of 95% LTV mortgages for first-time buyers within the UK. Whilst these types of loans are incredibly popular, their appearance prior to this scheme has become scarce. Lenders had become weary of financial instability and recession associated with the Covid-19 pandemic. As such, they pulled their riskier products and enhanced their own financial security with higher deposit requiring mortgages.
Whilst this protects the lenders best interests, it prevents first time buyers from easily accessing the market. Saving thousands of pounds for a deposit payment can be incredibly challenging for individuals that don’t have a house to sell already. Whilst these individuals may be more than equipped to afford the monthly mortgage payments, ensuring that you can stockpile your cash is more prohibitive.
To combat this, the mortgage guarantee scheme satisfies both parties. First time buyers can access to more attainable mortgage products, whilst lenders are offered increased security. This occurs through the compensation guarantee offered by the UK government. The government guarantees the portion of the mortgage that is over 80%. With lenders already feeling comfortable to provide 80% LTV mortgages, this increases their confidence. Should the first time buyer default on their mortgage payments, the government would compensate the 15% of the mortgage. This would make up the remaining portion of the 95% LTV mortgage.
Who can utilise the scheme?
Whilst it is targeted towards and often most beneficial for first-time buyers, the mortgage guarantee scheme can be accessed by most home movers across the UK. There are some eligibility requirements however. The loan can only be used on residential properties for instance. It is also made clear that the scheme can only be utilised for properties that you intend to live in. It cannot be used to purchase second homes or buy-to-let properties. The scheme can also be used on properties priced up to £650,000 that are either existing on new-build homes.
Lenders must offer borrowers a five-year fixed-rate loan as part of their range of products. This allows homebuyers more predictability and stability in their payments for an extended period of time.
How to save for a 5% deposit
Whilst the availability of 95% LTV mortgages for first time buyers does increase the affordability of purchasing a house, saving for a deposit can still be a challenge. 5% of a house purchase price can still equate to a lot of money. For instance, a £200,000 is reasonably achievable for a working class income. However, it requires a £10,000 upfront payment when utilising the Mortgage Guarantee scheme. How can a first time buyer acquire these funds to afford to purchase a house?
There is further government support for first time buyers in order to help get on the property ladder. Some of this support even extends to saving for a deposit. The Help to buy ISA and Lifetime ISA are two of the products that offer incredible bonuses on top of your savings, decreasing the time it will take to save for your new home.
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Help-To-Buy ISA
Whilst the Help to buy ISA is no longer available, anybody who opened an account before it was shut down can still use the account to its full capacity. The scheme will continue to run until November 2029. This account allows savers to pay up to £200 per month into the account. Once you decide to purchase a house, the government will contribute an additional 25% of your savings (up to £3000).
This account only applies to first time buyers who have never owned a property in the past. It can only be used on properties up to the value of £250,000 (or £450,000 in London). New accounts cannot be opened as the scheme was closed to new applicants in November 2019.
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Lifetime ISA
This is an account that is still active and new accounts can be activated. The LISA has a slightly different function to the Help to buy ISA. Whilst, it does offer first time buyers the chance to boost their savings towards their first property, the lifetime ISA also allows you to save towards a retirement fund, whilst receiving a 25% monthly bonus from the government on whatever you save.
Unlike the Help to buy ISA, first time buyers can save up to £4000 which can be deposited at any time of the year. The 25% government bonus is paid in chunks monthly, depending on how much you have added to your savings. The maximum yearly government bonus is £1000. This means that if you contribute the maximum amount per year, you’ll be saving £5000 plus interest. Interest is built on top of he government contribution, as well as your own savings. This money can be accessed when purchasing your first property or after reaching the age of 60.
Final Thoughts
95% mortgages for first time buyers can be a great option to help you get on the property ladder. 95% loans are available on properties priced up to the limit of £650,000 and offer financial security for both buyers and lenders. You should also consider other government support such as the Help-to-buy ISA or Lifetime ISA which offer incredible bonuses on top of savings that may decrease the amount of time needed before purchasing your first home.