A new government-backed mortgage scheme will help first time buyers or current homeowners secure a mortgage with just a 5% deposit. Mortgage lenders are launching new products off the back of the scheme. The Freelance Informer reports on the latest government scheme, plus other deals on the market from commercial lenders. But who will foot the bill if these government-backed mortgages go south?
This is great news for those that do not have a large deposit to purchase their first home or are looking for a place that accommodates a growing family. But the clincher really is that people can put assets to their name and if house prices continue to rise, build in some equity.
However new this government scheme is, the topic of affordability is nothing new. The sub-prime mortgage crisis was only a decade ago and families and businesses are still reeling with the aftermath.
So, when we say government-backed we are essentially saying taxpayer-backed, aren’t we? Who will ultimately pay the price if these government-backed mortgages do not get paid? It could be us, folks.
Points to ponder
Every freelancer or small business owner should start asking these questions to their mortgage advisers or potential mortgage lenders before they start the application process.
- Will lenders accept self-employed applicants?
- Will we see more mortgage protection insurance deals come to market for self-employed holders of government-backed mortgages?
- Could extra protection in addition to life cover become a requisite to getting a mortgage application accepted?
How do government-backed mortgages work?
The government will provide lenders with the option to purchase a guarantee on the top-slice of the mortgage. In other words, the government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession. The guarantee will apply down to 80% of the purchase value of the guaranteed property.
The guarantee will be valid for up to 7 years after the mortgage is originated, evidence shows that loans are unlikely to default after such a period has elapsed.
How long will the government-backed mortgage scheme last?
The scheme is intended as a temporary measure. It will be open for new mortgage applications from April 2021 to December 2022, in line with the government’s view that the current scarcity of high loan-to-value lending is primarily a response to the pandemic rather than a symptom of a longer-term structural change in the mortgage market.
The government said it will review the continuing need for the scheme towards the planned end date, and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective home owners.
Which lenders are involved in the scheme?
Now that the government is providing some support, a slew of mortgage lenders would have loved to come out of the woodwork to offer 95% mortgages. But the government is keeping it to a select few, which include Lloyds, Santander, Barclays, HSBC and NatWest are launching mortgages under the scheme from today (April 19), with Virgin Money to follow next month.
But remember, the scheme will not last for long and each lender will have their own decision process and eligibility criteria.
For example, from Tuesday 20 April 2021, people looking to buy a new home can apply for one of three, fee-free, 95% LTV mortgage products provided by Santander, as part of the Government’s Mortgage Guarantee Scheme.
The three products, which are repayment mortgages for houses priced up to £600,000 or flats and leasehold properties up to £400,000, are available to first-time buyers and home-movers. The mortgages available are:
- two-year tracker rate at 3.99%; zero product fee; free valuation
- three-year fixed rate at 3.99%; zero product fee; free valuation
- five-year fixed rate at 4.09%; zero product fee; free valuation
Under the terms of the scheme, the government will guarantee the amount of the mortgage lending over 80%, ie 15% of a 95% loan to value mortgage and customers will be subject to Santander’s normal affordability checks.
While Santander’s products are not available on new build properties, eligible first-time buyer customers will be able to apply for Help to Buy on new build properties up to a maximum of 75% LTV – where they provide a 5% deposit, with a government top up providing the remaining 20%. More information on Help to Buy can be found online.
“We know that raising a large deposit can often be challenging for potential home buyers, so we’re pleased to be part of the government’s Mortgage Guarantee Scheme offering a range of 95% mortgages to help both first-time buyers and home movers, said Susan Allen, CEO Retail and Business Banking at Santander.
Fellow participant of the scheme, HSBC said to be able to apply for one of their 95% Mortgages you’ll need to be able to answer yes to the following questions:
- Do you need to borrow £400,000 or less?
- Do you have a minimum of 5% deposit?
- Upon completion of your purchase, will this be the only property you own and will it be your main residence?
- Can you confirm that the property is not a new build*, not a flat or maisonette, and not part of a Shared Ownership or Shared Equity scheme?
*A new build property is defined as: a building that’s been built in the last 24 months, which includes property bought directly from a builder or developer, a property that’s yet to be occupied for the first time or a property that’s currently unoccupied, for example, following a renovation or conversion. Not available for buy to let.
Michelle Andrews, HSBC UK’s Head of Buying A Home said the bank has supported home buyers and the wider housing market throughout the pandemic and are excited to support the Mortgage Guarantee Scheme.
“After such a turbulent year it is great that this scheme will make a real difference in enabling first time buyers who didn’t think they would have a chance of getting a mortgage and home movers to get the keys to their new home,” said Andrews.
What other government home ownership options are available?
95% Mortgages: From 19 April 2021 first time buyers will be able to purchase a home with only a 5% deposit. The scheme will help to increase the supply of 5% deposit mortgages for credit-worthy households by supporting lenders to offer these products through a government-backed guarantee.
Help to Buy: A government equity loan that supports first time buyers with a low interest loan towards their deposit.
Shared Ownership: Gives first time buyers the option to buy a share of their home (between 25% and 75%) and pay rent on the remaining share.
First Homes: A new scheme designed to help local first-time buyers and key workers onto the property ladder, by offering homes at a discount of 30% compared to the market price.
See more information on the mortgage guarantee scheme.