Everything first-time buyers need to know about the 95% mortgage guarantee scheme

The challenges of getting on the property ladder have made headlines for years. In March’s Budget, chancellor Rishi Sunak unveiled a new scheme that could be a lifeline for first-time buyers. It will help aspiring homeowners purchase properties with just a 5% deposit.

Traditionally, you would have needed a 5-10% deposit to purchase a home. However, the number of low-deposit mortgages fell significantly in 2020 due to the pandemic. As house prices and rent have increased, saving a deposit has become a huge obstacle. The average first-time buyer is taking 6.6 years to save for a deposit, according to Yes Homebuyers.

It’s led to many turning to their parents for help. The Bank of Mum and Dad is now funding one in two house purchases among the under-35s, according to research from Legal & General. Seven in ten of these new homeowners say they would have been unlikely to buy without financial support. The Bank of Mum and Dad has become an essential part of the property market, but those without financial support can struggle. The new scheme could help close this gap.

Securing a home with a 5% deposit

The new government scheme will offer a guarantee to banks to encourage them to offer 95% mortgages. The government will guarantee the portion of the mortgage over 80%, so if a homeowner defaulted, the government would partially compensate the lender. The guarantee means lenders can now approve applications with more confidence.

If you’re thinking about taking advantage of the scheme, here are seven things you need to know.

1. The scheme is open to all

While the scheme aims to help first-time buyers get on the property ladder, it is open to all. If you or someone you plan to buy with has owned property before, the scheme is still an option worth considering.

2. You must take out a mortgage before December 2022

The first deals are expected to be open for applications from April 2021 and the scheme will run until December 2022. Your mortgage application must complete before the end of the scheme. However, the scheme will be reviewed and, if successful, could be extended.

3. The mortgage must be used to purchase a home to live in

You cannot use the guarantee scheme to purchase a second home or a property to use as a buy-to-let. It must be for your main residential home.

4. It can be used to buy properties up to £600,000

The scheme can be used to purchase all properties, both old and new, priced up to £600,000. It cannot be used if the property exceeds this amount. For buyers living in expensive areas of the country, including London, it may mean they have less choice.

5. You must choose a repayment mortgage

You cannot choose an interest-only mortgage, but instead have to select a repayment mortgage. This means monthly repayments will be higher, as you’ll be paying off the interest and some of the amount borrowed. However, once the term of the mortgage is finished, you’ll own the home outright.

6. Interest rates are likely to be higher

As the equity you own within your home will be lower, it’s expected that interest rates will be higher. Interest rates have been historically low since the 2008 financial crisis but even a small difference can have a large impact when you’re borrowing to buy a house. It’s worth shopping around for different deals.

Remember to look for a new mortgage deal when your initial one comes to an end, as it could save you money.

7. You still need to prove you can make repayments

While the government is providing a guarantee, you still need to prove that you can make repayments. Be realistic about the amount you can borrow and what you can afford. You should also review your credit report, as lenders will use this to assess how likely you are to default.

Will the Stamp Duty holiday help first-time buyers?

During the Budget, the chancellor also announced he was extending the Stamp Duty holiday. Most first-time buyers are exempt from the tax, but it could provide them with more options.

Stamp Duty is a tax you pay when buying property, although first-time buyers paying £300,000 or less do not pay it. The Stamp Duty holiday means more home movers will be exempt, and those purchasing a residential home for up to £500,000 will receive a tax break until the end of June. The threshold will then fall to £250,000 until the end of September. The holiday could reduce the cost of moving home by thousands of pounds.

Most first-time buyers won’t benefit financially from the holiday. However, it’s hoped the tax break will encourage more people to move, so first-time buyers could benefit from having more choice when they do come to search for a home.

Ready to move? Contact us

If the new scheme has provided you with an opportunity to get on the property ladder, we can help you navigate the process and secure a mortgage that’s right for you. Please contact us to learn more.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.