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Mortgage guarantee scheme to bring back 95% mortgages

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As a part of the March budget, Chancellor Rishi Sunak announced a new mortgage guarantee scheme, designed to make home ownership more accessible for first-time buyers and home movers across the UK.

Under the terms of the mortgage guarantee scheme, the government will guarantee 95% mortgages for buyers with 5% deposits. The scheme is very similar to the Help to Buy mortgage guarantee scheme which ran from 2013 to 2016 and was used by 105,0000 buyers in the UK.

Here is a rundown of everything you need to know about the 2021 mortgage guarantee scheme.

Why is the mortgage guarantee scheme being introduced?

The COVID-19 pandemic has left a lasting impression on the housing market, with the number of low-deposit mortgages being offered plummeting.

The new scheme aims to give banks the confidence to offer 95% mortgages again by reducing some of the traditional risks associated with doing so.

This should hopefully provide prospective home buyers the opportunity to buy sooner, giving a much-needed boost to the housing market which slowed down at the turn of the year following the announcement of another national lockdown.

The guarantee builds on the government’s other recent commitments to support homeownership, such as an extension to the Stamp Duty Land Tax Holiday, which will now last until June 2021, with a tapered extension lasting until September.

The government has also expressed the belief that many consumers, especially those who find it harder to save, may benefit from the security offered by longer term fixed rate mortgage products.

How will the mortgage guarantee scheme work?

The government will provide lenders with the option to purchase a guarantee on the ‘top-slice’ of a mortgage. This means that the government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession.

The guarantee will compensate lenders for the same losses and reasonable costs that they would be entitled to recover from the borrow. It will be valid for seven years after the mortgage has originated.

Who is eligible for the mortgage guarantee scheme?

The mortgage guarantee scheme will be open to first-time buyers and home movers across the UK. To receive the support, you will need to be buying a property that you intend to live in yourself. This means that second homes and buy-to-let properties are not eligible.

Both new-build and existing properties priced up to £600,000 are eligible for the scheme. Anyone who uses the scheme will need to apply for a repayment mortgage and pass standard affordability checks. This is likely to include a loan-to-income test and credit score assessment.

The mortgage that is being applied for will need to be for between 91% and 95% of the value of the property being purchased. This will usually be described as a high loan-to-value (LTV).

How long is the mortgage guarantee scheme set to last?

The government have advised that the mortgage guarantee scheme will begin in April 2021, lasting until December 2022. The government’s justification for his time frame was that the current scarcity of high LTV lending was primarily a response to the pandemic, rather than a ‘long-term structural change to the mortgage market’.

A review will take place when the end date for the scheme draws nearer and a decision will be made whether sanctioning an extension would continue to deliver the same benefits for prospective homeowners.

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