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The 95% mortgage guarantee scheme: understanding your options

The 95% mortgage guarantee scheme: understanding your options

The 95% mortgage guarantee scheme: understanding your options

At a glance

  • The scheme could be useful for young buyers with no parental financial assistance – who cannot see themselves saving more than a 5% deposit
  • But there’s currently a shortage of mortgage choice for the new scheme and interest rates for borrowers are likely to be high
  • 95% mortgages do already exist outside of the scheme – and there are options that allow family members to help out in the buying process
  • It’s key to get information from an informed expert who knows the options and is on your side

The news that a 95% mortgage scheme is being launched to encourage younger people to get a foot on the property ladder is welcome. After all, no one can deny that saving for a hefty deposit is usually extremely difficult, especially in the midst of a pandemic.

But let’s look at the small print. Do the details – in particular how much it will cost borrowers to service the debt in the long-term – mean that there are ‘cons’ as well as ‘pros’?

How does the initiative work?

The scheme involves the government offering a guarantee to banks to encourage them to offer 95% mortgages. It runs from April 2021 to December 2022, for properties old and new up to £600,000. It is not restricted to first-time buyers, although this is likely to be the group most attracted to the prospect of requiring just a 5% deposit.

Under the scheme, the government will partially compensate the mortgage lender if a homeowner fails to pay their mortgage – if that sounds familiar, it’s because it’s modelled on the Help to Buy mortgage guarantee scheme used by over 100,000 buyers up to 2016.1

There are a few other restrictions. The new scheme is not open for buy-to-let or holiday home purchases, of course, and applies only to repayment (not interest-only) mortgages. All applicants must pass affordability checks assessing their income and credit scores

Is it the best way to buy?

So far, so obvious and sensible. However, is this new route definitely the best way for all younger buyers to consider getting their first home?

Perhaps not, says Paul Johnson, Head of Mortgages at St. James’s Place. He believes that younger buyers, and their parents or guardians if appropriate, should look in the round to find the best route to buy.

“One factor to consider now is the relative shortage of mortgage choice for the new scheme. No building society is taking part, and so far, only a few banks have stepped forward. Therefore, interest rates for borrowers are likely to be very high,” he warns.

What are the alternatives?

While every applicant’s circumstances will differ, some may find other routes to ownership more acceptable and cheaper.

“There are some 95% mortgages already, not within the scheme. Alternatively, some banks offer an option for a family member to put down a deposit for the young buyer – effectively that means no deposit has to be paid at all by the actual purchaser,” says Johnson.

“There’s also an offset mortgage from some lenders, allowing a family member’s savings to be used to ‘offset’ the loan taken out by the younger person,” he adds.

There might even be a more radical alternative to all of these – do nothing and wait, for six or 12 months, especially for the financial side-effects of the pandemic to become clear.

During that time more saving can take place, possibly meaning a larger deposit and a wider choice of lower-interest mortgages. House prices could dip, individual job prospects may change, or the 95% mortgage market become more competitive as additional lenders enter the fray and vie for customers.

Seek advice

Of course, having looked at all of these, it’s perfectly possible that the new guaranteed scheme fits the bill best. It is certainly likely to be useful for younger purchasers with no parental financial assistance, as well as for those who have saved yet cannot see themselves reaching beyond a 5% deposit.

“Weigh the pros and cons not just of the new scheme but of all the alternatives available,” continues Johnson. “There are almost certainly more options than you think, so it’s key to get information from an informed expert who knows the options and is on your side, but can offer guidance.”

Looking for a trusted adviser to help you with your mortgage options? Talk to your St. James’s Place Partner today.

Your home may be repossessed if you do not keep up repayments on your mortgage. Some Buy-to-Let Mortgages are not regulated by the Financial Conduct Authority.


1Help to Buy: Mortgage Guarantee Scheme quarterly statistics, 28 September 2017

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