Mortgage Guarantee Scheme: 95% mortgages

The government-backed mortgage guarantee scheme, designed to help buyers with a 5% deposit buy a home, runs until June 2025. Read on to find out if it could help you buy a house and what the alternatives are...

Angela Kerr Director, Editor

KEY INFORMATION

Mortgage guarantee scheme: Summarised

• The mortgage guarantee scheme helps first time buyers, home movers and previous homeowners to buy a property with a 5% deposit.
• You can buy a home worth up to £600,000 but it must be a home to live in – you can’t use this scheme to get a Buy to Let or second home.
• But the scheme isn’t targetted at consumers but rather it was introduced to encourage lenders to offer 95% mortgages which had largely disappeared during the pandemic and it’s due to run until June 2025.
• However, many lenders now offer 95% mortgages not using this scheme and there may be better schemes for you.

What is the mortgage guarantee scheme?

The mortgage guarantee scheme was launched in April 2021 to increase the supply of 5% deposit mortgages and stimulate the housing market after the pandemic by supporting lenders (ie banks and building societies) with a government-backed guarantee.

Some 44,386 mortgages have been completed with help from the mortgage guarantee scheme since it launched, according to government figures.

How does the mortgage guarantee scheme work?

If you apply for a 95% mortgage that’s backed by the scheme, the process will work in the same way as if you’re getting a standard mortgage.

But it’s different for the lender. If the lender is using the mortgage guarantee scheme, the government guarantees the portion of the mortgage over 80%. This means they’ll cover some or all of the shortfall if your house is repossessed and sold for less than the outstanding mortgage amount.

The mortgage guarantee scheme will run until June 2025.

Who is eligible for the mortgage guarantee scheme?

To be able to access a mortgage via the mortgage guarantee scheme, you can be a first-time buyer, home mover or previous homeowner. There are other criteria you’ll need to meet too including:

• You must be buying a main home to live in: You can’t use the scheme to invest in a Buy to Let or buy a second home. The property must also be in the UK.
• The property must be worth £600,000 or less: However, some lenders using the scheme may have a lower maximum amount they’ll lend. For example, Barclays says you can apply to borrow up to £570,000 for a house or £275,000 for a flat.
• You can apply for any property type – in theory: Unlike with schemes like the previous Help to Buy equity loan scheme which only allowed you to buy a new build house, you can buy new builds or older properties with this scheme. However, the type of property each lender will let you buy varies. For example, Barclays and Halifax won’t lend on new builds via this scheme.
• You’ll need a deposit of 5%-9%: You’ll need to take out a mortgage with an LTV of 91% to 95%. So on a £200,000 property, your deposit would need to be between £10,000 (5%) and £18,000 (9%).
• You must apply for a repayment mortgage: You can’t take out an interest-only mortgage with this scheme.

Plus, you’ll need to pass the lender’s usual affordability checks.

Which lenders are taking part in the mortgage guarantee scheme?

Major lenders including Barclays and Halifax are taking part in the scheme. However, many lenders now offer 95% mortgages without using the scheme. For example, NatWest is no longer using the mortgage guarantee scheme.

It’s important to note that if a lender is using the mortgage guarantee scheme, there is no direct benefit to you – the benefit is to the lender in terms of the government-backed guarantee that offers protection. So there’s no reason to focus only on lenders that are signed up to this scheme. Make sure you look for the best deal for you – or even better, get a fee-free mortgage broker to do the legwork for you.

Use our online mortgage finder, or speak to our award winning mortgage brokers at L&C for free expert advice, to start getting the best deal today

Pros and cons of the mortgage guarantee scheme

The advantages of using the mortgage guarantee scheme, or getting any 95% mortgage, include:

• You can buy a home with just a 5% deposit
• It means you can move sooner, save on rent and hopefully capitalise on house price growth.

Disadvantages of using the mortgage guarantee scheme:

• When you take out a mortgage with a small deposit, you’ll usually pay a higher interest rate than if you have a bigger deposit.
• Also, you may find it harder to remortgage once your deal ends, if your property has dipped in value or if it becomes more difficult to get low deposit mortgages.

How to apply for the government mortgage guarantee scheme

The government mortgage guarantee scheme isn’t something you apply for as such. If you’re looking for a 95% mortgage, you’ll search for a deal as normal – the easiest and quickest way to do this is to use a fee-free mortgage broker.

Then, if the deal you choose is backed by the government mortgage guarantee scheme, this means the lender has extra security in place if you default.

Are mortgage rates usually higher on 95% mortgages?

Yes, if you take out a 95% mortgage with a 5% deposit, you’ll probably pay a higher rate than if you put down a 10% deposit or more. For the best rates, our best first time buyer mortgage rates guide is updated monthly with the latest lenders offering mortgages for first time buyers with 20%, 15%, 10% and 5% deposits, as well as details of no deposit mortgages.

Use our online mortgage finder, or speak to our award winning mortgage brokers at L&C for free expert advice, to start getting the best deal today

Is it risky to take out a 95% mortgage?

If you take out a mortgage with a small deposit, the risk of negative equity, may be higher than if you put down a larger deposit. Negative equity is when the value of your home is lower than your outstanding mortgage balance.

However, by taking out a repayment mortgage, you’ll be building up equity in your home and hopefully your house will increase in value over time too. But you should think carefully before committing.

Has the mortgage guarantee scheme been extended?

Yes. The mortgage guarantee scheme was initially due to end in December 2022 but it was extended until 31 December 2023. However, in the 2023 Autumn Statement, the then Chancellor extended it again and the mortgage guarantee scheme will now run until the end of June 2025.

Find out how much you could borrow with our mortgage calculators or get mortgage advice to see what your options are.

What are the alternatives to the mortgage guarantee scheme?

There are a number of alternatives to the mortgage guarantee scheme, including:

• Shared Ownership: You’ll buy a share (usually 25%-75%) of a property and pay rent on the remaining share to the housing association or private developer that owns the building. But you’ll need to meet eligibility criteria and there are lots of potential pitfalls to be aware of. Find out more in our guide Shared Ownership: What is it? Is it worth it?.
• 100% mortgages: Skipton Building Society offers a 100% mortgage designed to help renters buy a home if they have a minimum 12 month proven track record of paying rent, as well as, meeting other lending criteria. See our guide for more advice on how to get a mortgage with no deposit.
• Deposit Unlock: This is a scheme developed by the House Builders Federation to help first time buyers and home movers buy a new build home with just a 5% deposit.
• First homes: There’s also the government First Homes Scheme where you may be able buy a home for 30% to 50% less than its market value when you meet certain criteria (although qualifying properties are very scarce).

Not quite ready to buy: Here are the steps you need to take now

It’s always a good idea to save as much as you can in advance of buying, as this obviously reduces the amount that you will have to pay back in the long term and also gives you a much wider choice of cheaper mortgage products in the short term. Here are the steps you can take to get yourself in a position to afford to buy:

• You’ll need to work out how much you can afford to buy and, in return, how much you will need to save to be able to buy your first home. See our advice on saving for your deposit which helps you to work out your budget and tips on how to accelerate your savings. Also, see our guide How much can you afford to borrow on a mortgage.
• Getting your credit rating in order is key to mortgage success. See how to improve your credit rating before getting a mortgage
• If you are under 40, the Lifetime ISA could be a great way to boost your savings. You can earn up to a £1,000 government bonus on your savings each year towards buying your first home or your retirement. But make sure you read the smallprint first to check it’s right for you.

Use our online mortgage finder, or speak to our award winning mortgage brokers at L&C for free expert advice, to start getting the best deal today.