Government to Bring Back 95% Mortgages with Guarantee Scheme

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Added on March 22nd 2021

First-time buyers are to receive a helping hand from the government as it offers to underwrite 95% mortgages as part of the 2021 Budget.
This new initiative means that some lenders will be able to offer first-time buyers mortgages of up to 95% of the property’s value. Homebuyers, whether first-timers or not, will also be pleased to find out that lots of lenders are relaxing their lending criteria to accommodate people with irregular income or less-than-stellar credit scores.

Generation Rent to become Generation Buy

Prime Minister Boris Johnson said last October that he had plans to help Generation Rent to become Generation Buy, but he provided no real details at that time. The new scheme starts in April and enables buyers, whether first-timers or not, to purchase properties worth up to £600,000 with as little as a 5% deposit.

How does the scheme work?

It’s similar to the now-defunct Help to Buy guarantee scheme, which closed off to new applicants back in 2017.
The buyers themselves won’t have to do anything and they won’t see anything unusual at their end, as it’s the lenders that will be incentivised to offer 95% mortgages.
Lenders will offer these 95% mortgages and the government will guarantee the outstanding amounts if the borrower defaults and there’s not enough equity to pay off the rest of the loan and provide the lender a decent margin.

It’s not a free-for-all!

Borrowers will still have to pass all the usual checks to make sure they can afford their monthly mortgage repayments. Ideally, although someone could borrow 95%, it’s usually better to have a larger deposit to reduce these monthly payments.

How much deposit will I need to save up?

A 95% mortgage is one that covers 95% of the property’s selling price, so you’ll need to put down 5% of this to secure the property. If you’re buying a £300,000 house, this works out at £15,000. Previously, lenders were offering a maximum of 85% mortgages, so you’d need to save at least £45,000 for that £300,000 house.

This might seem very generous, but you should always bear in mind that a smaller deposit means larger monthly repayments. That £300,000 house, assuming an interest rate of 1.5% over 25 years, will cost you £1,139 each month with a 95% mortgage.
If you took out a mortgage for 85% of the sale price, your monthly repayment would be £1,019 each month, which is £120 cheaper than the 95% option. It’s easy to see that while a 5% deposit might seem like a quick fix, you could be paying extra for a long time, so think ahead.

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