So you’ve got a 5% deposit and you’re tempted by the government’s new mortgage guarantee scheme? But how does it work and are you even eligible? Greg Cunnington, our Director of Lender Relationships and New Homes, answers your questions.
Since my last article we have now seen the return of mortgages for buyers with a 5% deposit. A number of these deals area available through the new government Mortgage Guarantee Scheme, which was launched to bring back options for buyers with a 5% deposit.
It would seem people have many questions around the scheme so I am dedicating this month’s column to answering as many of them as possible.
What exactly is the Mortgage Guarantee Scheme?
The Mortgage Guarantee Scheme is essentially a government insurance policy which gives protection to mortgage lenders who offer 95% LTV mortgages, against the risks associated with possible future house-price declines.
This gives mortgage lenders confidence to lend to buyers with a 5% deposit. This has seen mortgage products return to the market to help buyers with a 5% deposit.
This scheme is very similar to the Help to Buy 2 scheme (not to be confused with the Help to Buy equity scheme) that was in place between 2013 and 2016.
When are these mortgages available?
These products are available now.
In fact the scheme began on 19 April, and so several lenders have had mortgage products available from that date.
The announcement of its launch back in the Budget in March gave confidence to some mortgage lenders to introduce products for buyers with a 5% deposit without using the scheme. So mortgages have in fact been available since late March for low-deposit buyers from a few other lenders.
Who is eligible to use the scheme?
It is designed to help those buying a main residence. As such, the mortgage products are eligible for home movers as well as first-time buyers buying a new main residence.
The scheme cannot be used for second or holiday home applications, buy-to-let applications or if the purchase is to be in the name of a limited company (it must be in individual names).
What is the maximum purchase price?
The maximum purchase price of the scheme is set at £600,000. The maximum mortgage amount you could borrow would therefore be £570,000.
However, you should be careful here as most of the lenders that currently offer mortgage products via the scheme have set a maximum loan amount of £500,000 whilst they gently return to lending at this level.
Also, some of the lenders have a lower maximum loan amount available on flats (one lender as low as £270,000).
This highlights why it is so important that you are speaking to an intermediary with access to all of the lenders available.
We can navigate these options to ensure the most appropriate lender and mortgage product is found for your circumstances.
Also remember there are now lots of options with a 5% deposit from lenders not using the scheme, some of which can be used to purchase up to £600,000 on flats.
Which mortgage lenders are supporting the scheme?
Several major mortgage lenders have launched mortgage products on this scheme. These include Lloyds, NatWest, Barclays, Santander and HSBC who committed to launch with the scheme and have products available now, with Virgin Money expected to follow soon.
The number of lenders offering mortgage products for those with a 5% deposit without the scheme also continues to increase.
Lenders here include Accord Mortgages, Coventry Building Society, Skipton Building Society, Bank of Ireland, Atom Bank, Leeds Building Society, TSB, Metro, Buckinghamshire Building Society and Saffron Building Society.
The sheer number of options here highlights why you need to be speaking to a mortgage intermediary to ensure you have access to the best solution out there for your circumstances.
What criteria must I meet to meet to be eligible?
There are a couple of other eligibility criteria points that have to be met by either the client or mortgage lender to use the Mortgage Guarantee Scheme. Your application will need to tick the following boxes:
- The mortgage applied for must be between 91% and 95% of the property’s purchase price
- The property being purchased must be in the UK
- The mortgage has to be on a capital repayment basis
- The lender has to offer a five-year fixed rate option to clients (shorter fixed rates are also available)
- The mortgage must begin within the scheme dates – which is currently set to be in place until December 2022
Can I buy a new build property using the scheme?
Currently no lenders are offering Mortgage Guarantee Scheme products on new build property. The government has left this to the individual lenders discretion, so we may see some lenders allow this in the coming months, but there are no options here at the moment.
This is because most lenders on the scheme currently require a 15% to 25% deposit for new build property applications, so they do not want to jump to accepting these with a 5% deposit yet.
We have access to lenders that will accept applications with a 10% deposit on new build property, some of which are via selected intermediaries only, so please get in touch if this would assist you.
Don’t forget, the Help to Buy scheme is still in place for first-time buyers who wish to purchase eligible new build properties via the scheme with a 5% deposit.
Please get in touch if you wish to speak to an adviser to discuss how you could benefit from the Help to Buy scheme.
How much can I borrow?
Currently, no lender is lending more than 4.49x your total income for buyers with a 5% deposit.
However, each individual lender uses a unique affordability model to calculate your exact maximum borrowing and as such the amount you can borrow is likely to vary with each lender offering mortgages in this space (potentially quite significantly).
Lenders take different views on how much income they will use for your maximum borrowing from additional income sources such as bonus, commission and overtime income; they all assess self-employed income quite differently.
The impact that credit commitments or childcare costs and school fees will deduct from what you can borrow varies lender by lender.
An intermediary will be able to assess your maximum borrowing from all of the lenders they have access to, savings you lots of time speaking to them individually to get these figures, which again highlights the importance of ensuring you speak to an intermediary with access to as many lenders as possible.
What mortgage rates are available?
The launch of the Mortgage Guarantee Scheme has seen some rates come out lower than those available last month, with a two-year fixed rate available at 3.73% and a five-year fixed rate at 3.89% market leading at the time of writing.
However the best rate will not always be the best deal for your circumstances – it may be with a lender that will not offer you the most borrowing, or are not happy with your income scenario or the property type being purchased.
A good intermediary will be able to let you know the best deals available for your individual circumstances.
You can check out the best deals available right now via our website, or contact us to speak to an adviser to confirm the best deal for your individual circumstances.
Can I get a mortgage using the scheme if I am self employed?
Good news – yes! The majority of lenders using the scheme, and those lending to buyers with a 5% deposit without the scheme, will accept applications from self-employed clients.
However – be careful. One major lender is currently not accepting applications from self-employed clients for their products via the scheme.
Also, due to the economic uncertainty of many businesses caused by the pandemic, lenders will now do a more detailed manual underwriting assessment for self-employed applications.
This means they typically will want to see more documentation than normal, including your latest three-months business bank statements and a detailed explanation of the business current trading position.
How an intermediary can assist self-employed individuals
A good intermediary will know the lenders criteria for self-employed individuals, and so can ensure your application is steered to a lender comfortable with your scenario. For example, some lenders will use net profit for limited company directors whilst some will take the salary and dividend figures as your income.
This can be a big difference, and so not getting this correct at the start, can waste a lot of time and cause frustration when the borrowing comes back lower than hoped.
Most importantly, we have exclusive access to the decision makers and escalated service teams with many lenders.
This means that by using an intermediary such as ourselves your application will be reviewed quicker than if you use a lender directly, and also that if any issues arise we are on hand to help smooth these through with the lender to avoid long delays.
We also have the experience of assisting lots of our self-employed clients in recent months since lenders began their more manual assessments, and so have the knowledge of who is more likely to be more favourable to your individual scenario and how to best present this to the lender.
Can offshore clients use the scheme?
Currently, all lenders offering mortgage products for buyers with a 5% deposit require both applicants to be UK residents and most require you to have permanent rights to reside in the UK.
Using an intermediary
Most of these lenders who have returned with mortgages for buyers with a 5% deposit are either only accessible via an intermediary, or are currently only offering the 95% mortgage products via intermediaries.
As such, you should ensure you are speaking to an intermediary so that you can be certain of obtaining the best product available to you in the market.
Please get in touch with us if you need any further advice. You can email us at AskAlexanderHall@alexanderhall.co.uk or use the contact us page on our website – click here.
This article was originally posted in What Mortgage online. You can see the original article here. Please note this will launch a new web page.