95% Government Mortgage Guarantee Scheme - Mortgages Northern Ireland
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95% Mortgage Guarantee Scheme

The UK Government has announced that they will launch a new mortgage guarantee scheme that will encourage lenders to return to 95% mortgage lending across all of the UK.

Before the start of the pandemic 95% mortgages were available from virtually every lender in the UK but the products more or less disappeared overnight leaving many buyers and sellers stuck in the middle. The new scheme announced by the UK Government will alleviate the fears of mortgage lenders across the UK who have been concerned that even a small downturn in house prices could leave thousands of homeowners in negative equity.

How will the 95% Mortgage Guarantee Scheme work?

The Government will provide mortgage lenders with the option to purchase a guarantee on the top section of the mortgage down to 80% of the purchase price so that in the event of a dip in house prices and a repossession the lender will be able to claim back 20% of the losses from the government. The scheme will effectively act as insurance policy for the lender.

Mortgage lenders will have to cover a 5% share if the net loss above the 80% threshold. This will help to ensure that lenders are not incentivized to issue loans to applicants who have credit issues or are struggling for affordability as they are deemed more likely to default.

Who is eligible for the 95% Mortgage Guarantee Scheme?

The scheme is designed to help all credit worthy households who are struggling to gather a 10% deposit. For a mortgage to qualify for the scheme it will need meet the following criteria.
  • be a residential mortgage (not second homes) and not buy-to-let
  • be taken out by an individual or individuals rather than an incorporated company
  • be on a property in the UK with purchase value of £600,000 or less
  • have a loan-to-value of between 91 per cent and 95 per cent
  • be originated between the dates specified by the scheme
  • be a repayment mortgage and not interest-only
  • meet standard requirements in terms of the assessment of the borrower’s ability to pay the mortgage, for example a loan-to-income and credit score test

What’s the deal likely to be?

As with all mortgage products the higher the LTV the higher the interest rate will usually be, although we have not been provided with any interest rate or product estimates we feel that the interest rate on these deals is likely to exceed 4% initially.

The Government are currently insisting that any lender who takes part in the scheme will have to offer a 5 year fixed product as part of their range so that buyers can benefit from the security that a longer term fixed rate brings, you should also bear in mind that by committing to a 5 year fixed rate deal you will effectively be tying yourself to the worst deal on the market for the full 5 year period.

As with all higher LTV products the credit scoring is likely to be extremely hard on these products due to the risk that they represent to the lender.

What’s the catch with the mortgage guarantee scheme?

Lenders will be required to pay the Government a commercial fee for each loan that is issued under the mortgage guarantee scheme. The fee will be set so that the scheme is self-financing, and lenders will have to compensate the Government for
  • Expected losses under the scheme
  • The administrative costs of the scheme
Inevitably the additional cost involved in providing these types of mortgage will be passed onto the customer via higher rates and setup fees, there is no doubt that this will be an expensive mortgage product for the consumer but for many it will be the only option.

How Long will the mortgage guarantee scheme last ?

The scheme is intended as a temporary measure. It will be open for new mortgage applications from April 2021 to December 2022, in line with the government’s view that the current scarcity of high loan-to-value lending is primarily a response to the pandemic rather than a symptom of a longer-term structural change in the mortgage market. The government will review the continuing need for the scheme towards the planned end date, and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective homeowners.