In the 2021 Budget, Chancellor Rishi Sunak announced details of the 95% mortgage scheme. The aim of the scheme is to encourage lenders to offer more 95% mortgages. This will help buyers with 5% deposits get accepted, with the Government backing part of the loan. This comes as part of the Government’s plan to turn ‘Generation Rent’ into ‘Generation Buy’.
Following the effects of the pandemic, many lenders took 95% mortgages off the table early last year. This has made it more difficult for potential buyers with only a 5% deposit get accepted for a mortgage. The scheme was initially hinted at back in October, but with the Budget 2021 announcement we now have more details.
How will the 95% mortgage scheme work?
Under the new scheme, all buyers will have the opportunity to have access to a 95% loan-to-value mortgage. This includes first-time buyers, home movers and previous homeowners. This is a welcome announcement for those who only have a 5% deposit. The main aim of the scheme is to encourage lenders to introduce more 95% mortgages. Here’s a look at how it works:
- This 95% mortgage scheme will operate the same as any standard mortgage. As the buyer, you won’t notice much of a difference between a 95% mortgage through this scheme and a 95% mortgage offered outside of the scheme.
- Lenders will see the biggest difference with the inclusion of a guarantee. This guarantee means that the Government will cover some of the cost of lender losses if the borrower defaults on payments. This may happen if the property is repossessed and the subsequent sale of the property is less than the outstanding mortgage amount.
- Under the scheme, the Government guarantees to cover 95% of any losses over the threshold of 80% of the loan-to-value. For example:
- For a £100,000 home with a 95% mortgage (£95,000), the government will cover 95% of the mortgage that is above 80% of the loan-to-value (£80,000). In this case, 95% of £15,000 is covered, resulting in a £14,250 guarantee.
- This new scheme will start in April 2021 and will run until December 2022.
Which buyers are eligible to take part?
The most important thing to note is that this scheme is NOT restricted to first-time buyers. It is aimed at anyone who is looking to buy but who can only get a small deposit. To summarise the Government’s Mortgage Guarantee Scheme announcement, here are the criteria:
- Must be a residential mortgage – not for second home and not buy-to-let
- Must be taken out by an individual not an incorporated company
- Needs to be on a UK property with a value of up to £600,000
- Must have a loan-to-value of between 91-95% – buyers will need a deposit of between 5-9%
- Needs to originate between the dates of the scheme
- Has to be a repayment mortgage – can’t be a interest-only mortgage
- Borrowers must pass standard assessment criteria for ability to repay e.g. credit score test, loan-to-income check
What’s the difference between the 95% mortgage and the Help to Buy Equity Loan scheme?
Both the Help to Buy Equity Loan scheme and a 95% mortgage allows buyers to get a mortgage with only a 5% deposit. However, while they may seem similar, they both differ considerably:
- Property Type – Help to Buy Equity Loan only applies to new-build homes, 95% mortgage applies to most properties
- Buyer Type – Help to Buy Equity Loan is only available to first-time buyers, 95% mortgages are available to all buyers
- Mortgage Size – The 95% mortgage consists of a 5% deposit and 95% repayment mortgage. Help to Buy Equity Loan require 5% deposit, 20% loan and only 75% repayment mortgage.
At Farr & Farr we know how overwhelming mortgages can be. There are many options for buyers and there are several schemes to help you depending on your circumstances. With our extensive experience in the industry, we can help answer any questions that you may have when it comes to buying your property. You can easily get in touch on our website or call us on 01452 380444.
