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- What is the mortgage guarantee scheme?
- Is the mortgage guarantee scheme still available?
- How does the mortgage guarantee scheme work?
- Do I qualify for the mortgage guarantee scheme?
- Mortgage guarantee scheme eligibility
- What are the pros and cons of the mortgage guarantee scheme?
- Do I need to apply for the mortgage guarantee scheme?
The mortgage guarantee scheme was introduced to try to increase the number of 95% loan-to-value (LTV) mortgages available to homebuyers with a 5% deposit.
It aims to ensure mortgages are available for first-time buyers trying to get on to the property ladder and allow existing homeowners who have a smaller amount of equity in their property to be able to move.
Read on to find out more about what the mortgage guarantee scheme is and how it works.
Partner SpotlightThink carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
What is the mortgage guarantee scheme?
The mortgage guarantee scheme is designed to persuade lenders to offer mortgages to buyers with a deposit of as little as 5%. The incentive for lenders to do so comes in the form of a government promise to effectively cover their losses if the mortgage goes wrong.
The scheme should mean that more 95% LTV mortgages are available to borrowers with a smaller deposit.
This programme is different from the mortgage guarantee scheme that was part of the Help to Buy programme, but ended in 2016.
Is the mortgage guarantee scheme still available?
The mortgage guarantee scheme is currently due to run until the end of June 2025. The scheme was set to end on 31 December 2023, but was extended by 18 months as part of the Autumn Statement 2023.
How does the mortgage guarantee scheme work?
One reason lenders tend to be less willing to take on borrowers with only a small deposit is that they view these loans as being riskier.
The mortgage guarantee scheme aims to remove some of that risk to lenders. Essentially, the government will compensate a lender for a portion of the losses they incur if a borrower falls behind on repayments and the property has to be repossessed.
The idea is that by reducing this risk, lenders will be more comfortable offering mortgages for smaller deposits.
Importantly, there is no direct benefit to you as a borrower from the guarantee scheme, other than there should be more low deposit mortgages available. So if you fall behind on your repayments, the lender can still repossess the property. It’s simply that a large chunk of the money the lender loses as a result of having to repossess the property is guaranteed by the government.
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Do I qualify for the mortgage guarantee scheme?
Mortgages available under the mortgage guarantee scheme can be taken out by first-time buyers and existing homeowners.
However, the scheme is designed specifically to help people looking to buy a residential home they intend to live in. This means buy-to-let mortgages are not available under the scheme.
Lenders may also set their own criteria. For example, some lenders won’t offer mortgages under the scheme if you want to buy a new-build property.
Mortgage guarantee scheme eligibility
Mortgages offered under the scheme can be used for home purchases worth up to £600,000, and at a loan to value of more than 90%, but less than or equal to 95%. In other words, you need a deposit of between 5% and 9.99%.
The scheme only applies to capital repayment mortgages. This means that your monthly repayments go towards paying both the interest and the balance of the loan. Interest-only mortgages aren’t available through the scheme.
Individual lenders can decide other criteria and features of the mortgages, including interest rates and fees. However, any lender participating in the scheme must offer a five-year fixed rate mortgage under the guarantee. This is so that borrowers with small deposits can opt for the security of fixed payments for a longer period.
» MORE: How a fixed-rate mortgage works
What are the pros and cons of the mortgage guarantee scheme?
Mortgages that are offered under the scheme are something of a lifesaver for many borrowers. It’s easier to save a deposit of 5% compared to a 25% deposit, for example. This enables would-be homebuyers to proceed with their purchasing plans and either get on to the ladder, or move up a rung to a new property.
However, there are some potential downsides. Mortgages aimed at borrowers with small deposits tend to come with higher mortgage rates. This means monthly repayments are likely to be larger than if you had a bigger deposit and qualified for a lower interest rate.
Having a smaller deposit also comes with a greater risk of falling into negative equity. This is when the size of your mortgage is more than the value of your property, which can create problems. For example, it might mean you struggle to get a remortgage deal when your initial fixed-rate deal comes to an end. This could leave you with little alternative but to move on to your lender’s standard variable rate (SVR), which is usually higher.
Moving house might also be more difficult, as the sum raised from the sale may not be enough to pay off your outstanding mortgage, let alone provide you with a deposit for the next property you want to buy.
If you buy a property with a larger deposit – say 20% – then even if the value of the property falls, it is less likely to drop so sharply that you end up in negative equity. But with a 5% deposit, the value of your home does not need to fall by much to leave you with a potential problem.
» MORE: Getting a mortgage with no deposit
Do I need to apply for the mortgage guarantee scheme?
Borrowers don’t directly have to apply for the scheme. To take advantage of the scheme, you simply need to apply for a 95% LTV mortgage from a lender who is participating in the scheme.
You might want to apply directly with the lender or, alternatively, you may prefer to use a mortgage broker. The advantage of using a broker and getting mortgage advice is that they can direct you towards the most appropriate mortgage for a borrower in your circumstances, as well as the lenders that are most likely to accept your application.
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