Mortgage guarantee scheme
It starts from April 2021 and could revolutionise house buying for first-time buyers particularly - but what does the mortgage guarantee scheme mean for you? Chancellor Rishi Sunak unveiled the new offering in his budget. It encourages building societies and banks to offer mortgages to those who only have a 5% deposit.
The scheme will be available to first-time buyers and current homeowners who want to buy a house worth up to £600,000 for either a new build or an existing property for sale.
The government says that the initiative will help participating lenders offer customers a long-term mortgage to their creditworthy customers.
The mortgage guarantee scheme will see the government taking on some of the risks for the low deposit loans, so lenders are protected from potential losses. One of the lenders' issues is that low deposit loans tend to be seen as a high-risk for them because a borrower will end up in negative equity should house prices fall.
Negative equity is when the homeowner owes more than their home is worth.
Under the mortgage guarantee scheme, lenders will:
- Offer a mortgage for up to five years.
- Provide options for those with small deposits wanting a fixed rate.
The new scheme is following in the footsteps of the popular Help to Buy' offering unveiled in 2013 to help reinvigorate the housing market after the financial crash.While Help to Buy is no longer running, it also offered 5% deposit mortgages to those taking part. So, how will this new scheme work in practice? Let's take a look.
The average price of property sold to a first-time buyer is a little over £200,000 A 5% deposit means the borrower will need to save £10,000 - that is around half of what is usually required for a standard mortgage. The 5% deposit means that the borrower will need a mortgage of £190,000 or 95% of the home's value.
Mortgage lenders usually offer to loan someone 4.5 times their salary - so borrowers will need to earn £42,000 per year to buy a home under this scenario.
Interior designer Manchester
Many, including Jan Carter, an interior designer in Manchester, welcomed news of the mortgage guarantee scheme.
She said: "The scheme offers first-time buyers and those wanting to move home the opportunity of accessing a mortgage with a small deposit. They can then buy the home of their dreams and this will be good for the property market, as well as property investment in the UK."
Jan, who specialises in creating show home interiors, added: "A strong property market is good news for those wanting to sell. Kharis & Kale Interiors can help with staging a property to sell and will create a stylish interior that will help sell a property faster."