It was announced in the spring budget earlier this month that the government will be introducing a new 95% mortgage guarantee scheme from April 2021, which will run until December 2022. The scheme has been introduced in response to a large-scale withdrawal of low LTV mortgages following the pandemic, pricing many first time buyers out of the market. As the Prime Minister put it, the new scheme will help ‘generation rent become generation buy’.
The new scheme means that some of the UK’s major lenders will be able to offer low-deposit mortgages on all residential properties valued up to £600,0000. The announcement was welcome news for many people, including those wanting to move up the property ladder or remortgage their existing home as the scheme is open to all. You don’t even technically need to be a first-time buyer to apply.
However, it’s important to understand that obtaining a 95% mortgage isn’t an easy or simple process, as you will still need to be prepared and meet the lender’s criteria especially in terms of affordability. In fact, affordability tests have not been relaxed as part of the scheme, which will catch out some buyers without prior experience of mortgage applications.
Here’s what to consider if you are thinking of applying:
A good credit score is essential when looking to secure a good mortgage deal. If you’re a first time buyer applying for a low-deposit mortgage you will need a good credit score for your application to be accepted. It’s important to keep up with your credit card, utility bill, mobile phone, loan and other payments to show lenders that you are able to repay your debts. You should also be on the electoral register. It’s important you aren’t financially tied to someone with a bad credit score as this can negatively impact you.
Even though the mortgage guarantee scheme means you only need a small deposit, you’ll still have to prove that you can afford the monthly repayments. Mortgage lenders have to adhere to restrictions whereby no more than 15% cent of their new business can be through offering mortgages that are over 4.5 times over the applicants’ annual income. This means that lenders won’t typically lend to higher LTI (loan to income) applicants for those with a 5% deposit. This is something to be aware of when applying, especially if you’re buying alone.
Have you been impacted by the pandemic? Lenders will be cautious about lending to people who have been financially adversely affected by the pandemic. If you have been furloughed, taken a mortgage holiday, or have had your days or hours reduced, you could find it more difficult to secure lending. You will need to provide bank statements, P60 and proof of deposit or income to accompany your application.
Get the right advice
It’s essential that you talk to a whole of market mortgage broker if you would like to apply for the new mortgage guarantee scheme. At The Mortgage Hub, we can talk you through the application process and find out if you are eligible for a mortgage without it impacting your credit score. We can also find the best mortgage for your circumstances and work out what your repayments will be.