Knowledge Guides

What is the Mortgage Guarantee Scheme?

Posted September 6, 2023
What is the Mortgage Guarantee Scheme?

If you’re considering stepping onto the property ladder, but daunting deposits are holding you back, then this blog post is just for you!

Launched by the UK government, this initiative can be a game-changer for first-time buyers and those struggling to secure a mortgage. Not sure how it all works or whether you’re even eligible? No need to stress because we’ve got you covered with an easy-to-understand, comprehensive guide that will answer your questions.

The Mortgage Guarantee Scheme is a plan designed to help you, as a homebuyer, secure a mortgage with just a 5% deposit. This scheme offers lenders the option to purchase a guarantee on mortgages where you’re able to contribute only a 5% deposit. The purpose of this guarantee is to provide protection for lenders against potential net losses if the property has to be repossessed.

In cases of repossession, this guarantee compensates mortgage lenders for 95% of their net losses up and down to 80% of the original purchase value of the property.

This scheme provides an extra layer of security for lenders when offering low-deposit loans and takes away some barriers previously preventing you from obtaining your own property with smaller upfront monetary commitments.

When was it launched?

The Mortgage Guarantee Scheme was created and launched by the UK government on 19th April 2021 as part of its initiative to turn “generation rent” into “generation buy”. The government has announced that the Mortgage Guarantee Scheme will be extended until 30 June 2025, providing continued support for potential homebuyers (Source: GOV.UK).

The scheme was designed to aid potential home buyers, particularly first-time buyers, who may struggle to save up large deposits. It supports purchase of homes costing up-to £600,000 and is available to both new-build and existing properties.

How does the scheme work?

  1. You begin by saving up a deposit for your home. You only need to save 5% of the property’s purchase price, thanks to the scheme.
  2. Once you have your deposit, you approach a lender – typically a bank or building society – who is participating in the Mortgage Guarantee Scheme.
  3. The lender evaluates the property and looks into other essential aspects such as your credit history, income etc., just like any other loan process. If everything checks out, they approve your mortgage loan.
  4. The lender then has an option to purchase a guarantee on this ‘higher-risk’ mortgage due to the low deposit requirement. This is to safeguard their interests against potential losses from repossessions.
  5. The loan is disbursed for purchasing your desired property. Now, you start repaying it off monthly, just like any other mortgage.

How has it helped first time buyers?

The Mortgage Guarantee Scheme has been significant in aiding first-time buyers. Here are the primary ways it has been beneficial:

Decreased Deposit Requirement
First-time homebuyers often struggle to save up for large deposits. The scheme requires only a 5% deposit, significantly reducing barriers to ownership for those struggling with upfront costs.

Increased Loan Accessibility
With the included guarantee, banks and building societies are more inclined to approve mortgages with smaller deposits, thereby increasing accessibility for first-timers who might otherwise be seen as riskier borrowers.

Higher Property Price Range
As the scheme covers properties valued at up to £600,000, potential buyers aren’t confined only to lower-value properties. More opportunities become accessible within their budget range.

Improved Market Stability
By encouraging homeownership and providing financial protection to lenders simultaneously, the overall housing market can maintain stability more effectively – which indirectly benefits all property purchasers, including first-time buyers.

So, by lessening some hurdles that come with buying your very first property – namely saving up a substantial deposit – it’s fair to say that this scheme provides a supportive way onto the property ladder.

Pros and Cons of the Mortgage Guarantee Scheme

Pros:

  1. Lower Deposit Requirement: Only a 5% deposit is needed, making homeownership more accessible.
  2. Increased Loan Accessibility: The scheme encourages lenders to offer more mortgages to those with smaller deposits.
  3. Higher Property Price Range: The scheme supports the purchase of homes worth up to £600,000, giving buyers more options.
  4. Government Support: Provides security to lenders, which can result in more favourable loan terms for borrowers.

Cons:

  1. Higher Interest Rates: Mortgages under this scheme often come with higher interest rates compared to those with larger deposits.
  2. Risk of Negative Equity: With a high loan-to-value ratio, there’s a greater risk of owing more than the property’s value if its market value decreases.
  3. Limited Availability: Not all lenders participate in the scheme, which can limit your options.
  4. Potential Remortgaging Difficulties: Remortgaging can be more challenging with a higher loan-to-value ratio.

Practical Tips for Prospective Buyers

Tips for those considering using the Mortgage Guarantee Scheme:

  1. Improve Your Credit Score: Ensure your credit score is in good shape to increase your chances of being approved for a mortgage.
  2. Compare Lenders: Shop around for participating lenders to find the best interest rates and terms.
  3. Budget Carefully: Ensure you have a budget in place that includes all associated costs, such as stamp duty, legal fees, and moving expenses.
  4. Seek Professional Advice: Consider consulting with a mortgage broker or financial advisor to navigate the process effectively.

Am I eligible for the scheme?

Any UK resident who can afford a mortgage but is struggling to save for more than a 5% deposit can access this scheme.

Where can I access the scheme?

You can access this program through participating lenders such as banks or building societies offering mortgages under this scheme.

Can I use the scheme with Shared Ownership?

No, the Mortgage Guarantee Scheme does not apply to Shared Ownership. The scheme is designed for use when purchasing a property outright.

If you are considering a Shared Ownership scheme, you may still be eligible for other types of assistance such as a Help to Buy Equity Loan or Shared Ownership schemes offered by housing associations.