The new Mortgage Guarantee Scheme explained

J Finance Mortgage Guarantee Scheme

The new government backed scheme offers some hope for first-time buyers with the chance to buy a property with a 5% deposit…

New Mortgage Guarantee Scheme

Over the past few years, the demand for higher and higher deposits has left many would-be first-time buyers stuck at the first post when it comes to buying a home of their own.

As house prices and living costs have risen, it has often been difficult for couples to save enough to get a foot on the property ladder, and it’s been even harder for singletons. With the average house price in the UK hitting £239,000 last summer, and most lenders demanding at least a 10% deposit, would-be home buyers have had to save almost £24,000 to have a hope of calling their home their own.

But there is a chink of light at the end of the tunnel thanks to the new mortgage guarantee scheme, which aims to get the housing market moving and, according to Boris Johnson, enable ‘generation rent’ to become ‘generation buy’.

Open to all

The interesting point here is that this scheme is open not only to first-time buyers but to current homeowners, allowing them the opportunity to upsize, using existing equity in their current property. The scheme is also not limited to new build homes.

So how will it work? Well, you will be able to buy a home costing up to £600,000 as long as you have a 5% deposit.

Buyers will, of course, still have to pass all the usual affordability checks, but the scheme should see lenders offer low-deposit products from April.

So how and why is this happening? Older home buyers will remember the days of 100% – or more – mortgages, and how that ended in a flurry of negative equity, home losses and major financial turmoil.

Offering reassurance

The pandemic has affected the lending market, with only eight low-deposit mortgage options on the market in January, according to the Treasury. Low-deposit products are seen as high risk by lenders as there is a greater chance that if house prices fall, the loan will be worth more than the property.

This time around, the government is offering to guarantee the low-deposit mortgages, in a bid to encourage lenders to offer them to prospective buyers, and to help stimulate the housing market as the stamp duty holiday starts to come to an end.

Boris Johnson proclaimed that: “Young people shouldn’t feel excluded from the chance of owning their own home and now it will be easier than ever to get onto the property ladder.”

The new scheme is similar to David Cameron’s Help to Buy scheme, which ran from 2013 to 2016. While that scheme helped to reignite the housing market after the 2008 financial crisis, its critics said it artificially inflated house prices. The current Help to Buy scheme is aimed at new build properties only.

The new mortgage guarantee scheme will be introduced in April, a couple of months before the extended stamp duty holiday ends at the end of June before tapering until the end of September. It is currently planned that the new mortgage guarantee scheme will run for 18 months until December 2022.

STOP PRESS (20/04/21)

The Government has now announced the full details of the 95% Mortgage Guarantee Scheme and a large number of High Street lenders have started to offer mortgages with just a 5% deposit. This can be from the borrower’s own savings or a gifted deposit. The Scheme offers a partial guarantee, generally of 15%, to compensate lenders if the borrower defaults on their repayments. There is however no standardisation of mortgage product or requirements and some lenders are offering 95% mortgages without using the Guarantee Scheme.

Rates are expensive, mostly matching those we saw for 90% mortgages 6-9 months ago and many of the rates are fixed for 5 years, which is not ideal for most first time buyers. There are, however, relatively competitive 2-year rates being offered by a smaller number of lenders. We are of course happy to talk to any to prospective buyer to ensure they can proceed and can obtain the right product for their circumstances.

If you would like to discuss a mortgage, and find out more about low-deposit products, J Finance will be happy to help. Please contact us without obligation.

Established in Berkshire in 2004, J Finance Ltd is one of the leading financial planning companies in the area. We serve clients across England and Wales. If you would like to discuss this subject or any other financial matter, please contact us on 01635 521 300 or email