The 5% Mortgage Guarantee Scheme

On 03 March 2021, Chancellor Rishi Sunak announced that as part of ongoing recovery measures to ensure that the hardest hit were supported, a government backed guarantee scheme would be introduced to enable those with small deposits of just 5% were able to secure mortgage finance which otherwise would not be available to them.

What is a Mortgage Guarantee?

Typically, when a borrower buys a property, the lender will require that borrower to have a minimum deposit in order to be able to take out the mortgage loan. This is typically at least 10% and this is to ensure that if the house price falls, there is a margin in which the lender will never be out of pocket because the house is worth less than what is owed under the terms of the loan.

Some lenders permit lower deposits, but sometimes, where there is a high loan to value (LTV) percentage, such as 90%, the mortgage lender will want some form of insurance known as a mortgage protection indemnity, to minimise the risk of them losing money in a negative equity situation. The borrower is usually responsible for paying for this insurance product as part of their mortgage offer.

What is the new Scheme?

The new scheme means that rather than an insurance provider underwriting the guarantee, the taxpayer will instead underwrite the guarantee, and should the house prices fall to a point where it renders the house worth less than the loan, the lender is protected from loss. This will create an incentive for lenders to give out mortgages where they would otherwise not have done so.

The borrower only needs to have a 5% deposit (though can offer more) and the scheme is to be available on purchases up to £600,000 but is only for the purchase of a main residence, rather than a buy to let investment.

Lloyds, NatWest, Santander, Barclays, HSBC are all said to be offering the loans from next month, according to the Chancellor, with more lenders likely to follow.

The new scheme will benefit first time buyers in particular who do not have equity in the sale of their own home to draw upon in their purchase. The scheme represents the Government’s drive to get more young people purchasing property instead of renting.