Dreaming of your own home in the UK? On your journey of buying a new home, it's worth looking closely at the option of the mortgage guarantee scheme. It offers a solution, particularly beneficial for first-time buyers.
Requiring only a minimal deposit, it's a gateway to home ownership for many. If you want to learn more about what other options are available, read about types of residential mortgages in the UK.
What is the government mortgage guarantee scheme?
Origins and purpose
The mortgage guarantee scheme emerged in response to the increasing difficulties first-time buyers and those with smaller deposits face in the housing market.
Launched by the UK government, the scheme aims to assist homebuyers struggling to accumulate a large deposit. Read about government's first home buyer schemes.
It specifically aims to boost consumer choice in the housing ladder, making it more feasible for first-time buyers to own their dream home. This government-backed guarantee aids mortgage lenders, enabling them to offer loans with higher loan-to-value ratios while mitigating their risk.
Key features
Key attributes of the mortgage guarantee scheme focus on widening accessibility to home ownership. Under this scheme, buyers can purchase a property with a deposit as small as 5% of the purchase price.
The government then provides a guarantee to mortgage lenders for a portion of the loan, which traditionally would be considered higher-risk due to the small deposit. This assurance from the government enables lenders to offer more high loan-to-value mortgages, typically up to 95%, without the associated risk usually deterring them.
The scheme covers a range of property types and isn’t restricted solely to new build properties, thus enhancing its appeal.
The mortgage guarantee scheme doesn't exempt the borrower from any mortgage obligations; they must still make regular mortgage payments as agreed with their lender.
Eligibility for the mortgage guarantee scheme
The programme extends to all prospective homebuyers, not exclusively those purchasing their first property, but certain qualifications apply:
The property's value must be under £600,000.
Mortgage approvals are contingent upon standard affordability assessments; assurance of approval is not guaranteed.
Only repayment mortgages are permissible through the scheme; interest-only arrangements are not available.
The scheme is not for buy-to-let properties.
It is not for new build homes.
Participation is limited to individuals; corporate entities are excluded.
Criteria for first-time buyers
For first-time buyers looking to step onto the property ladder, the scheme lowers the deposit requirement. Usually, owning a home seems out of reach with high deposit demands.
Eligibility hinges on not owning any other property at the time you buy your new home. This includes both in the UK and abroad.
The property you're buying must be your only home and you intend to occupy it.
Current homeowners
Current homeowners can also benefit from this scheme. If you're aiming to move but your deposit is tied up in your current property, the mortgage guarantee scheme eases this transition.
The scheme isn't for Buy to Let investors or those looking for a second home. Meeting these conditions ensures that the scheme supports its intended audience - genuine homeowners looking to secure their primary residence.
Income and employment considerations
When assessing your eligibility for the mortgage guarantee scheme, your income and employment status play an important role. Lenders evaluate your ability to sustain mortgage repayments.
Steady, reliable income sources bolster your application. This includes employment income, and other income sources like bonuses or freelance work, subject to lenders’ criteria.
Self-employed applicants should also not be deterred. The scheme is open for them. However, they must prepare for more stringent checks. Lenders often require a longer trading history and more financial records from self-employed individuals to assess the stability of their income.
For all applicants, an assessment of your outgoings versus income determines the mortgage amount. It's not just about having a job; it's about having the financial stability to manage a mortgage over time.
Remember, the scheme is there to help bridge the gap, but sustainable financial management is key to your application’s success.
Property price limits and geographical restrictions
Under the mortgage guarantee scheme, there are caps on the value of properties eligible for purchase. Properties costing up to a certain value fall under the scheme's umbrella, accommodating a broad range of housing options across various regions.
This cap ensures the scheme remains focused on helping buyers secure affordable housing rather than funding luxury property purchases.
Geographical considerations also influence eligibility. Different regions in the UK might have varying caps based on the local housing market. This reflects the diverse nature of property values across the country. You, as a potential buyer, need to check the specific cap applicable in the area where you intend to buy.
These limits shape not only the type of property you can purchase but also where in the UK you can buy. These restrictions aim to align the scheme with the wider housing sector's needs, focusing on helping as many people as possible to buy a suitable, affordable home.
How does the mortgage guarantee scheme work?
Role of the government
The government backs part of the loan's value in the mortgage guarantee scheme, reducing risk for lenders. This backing isn't direct financial support to the borrower, but rather an encouragement for lenders to offer mortgages to those with smaller deposits.
Process of securing a mortgage with the scheme
Securing a mortgage under this scheme starts like any standard application. You choose a participating lender and undergo financial assessment. Lenders, reassured by the government guarantee, may accept applications with smaller deposits. (We have a more detailed article on tips about saving for a deposit.)
Differences between mortgage guarantee and other mortgage types
The scheme's main difference is its lower deposit requirement and the government's backing, contrasting with traditional mortgages or guarantor mortgages.
While other schemes like Help to Buy target specific groups or property types, the mortgage guarantee scheme broadly supports first-time buyers and home movers with less upfront capital.
Although Help to Buy has ended, there are many replacements to assist you. Here's a very insightful article on what will replace Help to Buy.
Limitations of the mortgage guarantee scheme
Impact on mortgage rates and repayments
Mortgage rates with this scheme might be higher due to the smaller deposits and increased risk to lenders. It's important for you to compare different offers and consider the long-term costs, not just initial rates or monthly repayments.
Potential risks and considerations
The main risk is falling into negative equity, where your home's value drops below the mortgage balance.
Also, remember, if you face financial difficulty, the risk is yours, not the lender's. Failing to keep up with repayments could mean losing your home.
Carefully consider these factors against the benefits of owning a home.
In conclusion...
Here's a quick recap to understand the mortgage guarantee scheme:
You must provide a deposit ranging from 5% to 9% of the property's value.
After securing an accepted offer on a house, you apply for a loan from a bank supported by the mortgage guarantee. Seeking assistance from a mortgage adviser is advisable.
Homeowners need not apply to the government directly as the lender arranges this on their behalf.
The government will guarantee a portion of your home loan, safeguarding the mortgage lender in case of default.
If the government guarantees 15% of the loan and the borrower has a 5% deposit, it effectively amounts to a 20% deposit. Lenders favour this setup as it diminishes their risk.
This guarantee exclusively safeguards the mortgage lender and does not offer any protection to you, the borrower.
Lenders are obligated to remunerate the government a commercial fee for each mortgage enrolled in the scheme. This fee is likely to augment the loan cost for homeowners, either through interest rates or product fees.
In all other respects, the mortgage operates like a traditional repayment mortgage, so you must budget wisely for your monthly mortgage payments.