Mortgage guarantee scheme set to help homebuyers with smaller deposits

A new mortgage guarantee scheme helping homebuyers secure mortgages with 5% deposits is set to be announced in the Spring Budget. What will this mean for the property market?

The government will start offering incentives to lenders providing mortgages to homebuyers with deposits as low as 5%. This will help bring back mortgage options for buyers with smaller deposits. Mortgages with a 95% loan-to-value (LTV) ratio were dropped by lenders due to the economic impact of the COVID-19 pandemic.

Unlike the new Help to Buy scheme, the mortgage guarantee scheme is not only for first-time buyers or new-build purchases. It’s for the purchase of properties worth up to £600,000. The government hopes this will help more homebuyers with smaller deposits purchase property.

Prime Minister Boris Johnson says: “Young people shouldn’t feel excluded from the chance of owning their own home and now it will be easier than ever to get onto the property ladder.”

Through the scheme, the Treasury will incentivise lenders by guaranteeing portions of these loans. However, borrowers will still be subject to standard affordability checks.

Lack of low-deposit mortgages

In recent months, mortgage availability has hit the highest level since the first national lockdown in March 2020. The availability of 90% LTV mortgages has started to recover. However, mortgages with 95% LTV are still at record lows. At the start of February 2021, there was only 5 mortgage deals available for borrowers with a 5% deposit. This is down from 405 a year ago, according to data from Moneyfacts.

Currently, most lenders are unwilling to lend on 95% LTV terms. This is due to the economic uncertainty surrounding the pandemic. The mortgage guarantee scheme will bring forward more mortgage options for buyers with smaller deposits. Chancellor Rishi Sunak comments: “Owning a home is a dream for millions and we want to help as many people as possible.”

Impact on the property market

The Treasury hopes the mortgage guarantee scheme will bring a boost to the property market. Some experts believe this new scheme will lead to an increase in property prices.

In the past year, property prices and transactions have hit record levels, making it hard for first-time buyers to get onto the property ladder. During 2020, property prices increased by 8.5%, which is the highest growth rate since October 2014.

This rise is partly because of the increased demand due to the stamp duty holiday, which was first announced in July 2020. This temporarily raised the stamp duty tax threshold from £125,000 to £500,000, providing homebuyers the opportunity to save up to £15,000 on property purchases.

The stamp duty holiday was set to end on 31st March 2021. However, there has been mounting pressure on the government to extend this. Rumours are circulating that the Treasury will announce a three-month extension in the Spring Budget.

Help for first-time buyers

Ministers believe first-time buyers in particular will utilise these 95% LTV mortgages. This will help them get their first foot onto the property ladder. The aim of the mortgage guarantee scheme is to stimulate the property market and help more younger people purchase property.

Mark Hayward, chief policy adviser at Propertymark, states: “A government backed mortgage guarantee scheme will help first time buyers get on the housing ladder at a time when for many owning a home seems an impossible dream.

“Alongside the potential extension of the stamp duty holiday that we have been calling for, this new scheme will go some way in giving some hope to first time buyers at a time when the size of deposits required means they fall at the first hurdle.”

The mortgage guarantee scheme is a successor to the former Help to Buy scheme, which was open for buyers purchasing a new-build. The new Help to Buy scheme is now only open to first-time buyers, and there are regional price caps in place.

The mortgage guarantee scheme could help more first-time buyers. It could even help stimulate the property market after the stamp duty holiday ends. Additional details about the mortgage guarantee scheme will be announced as part of the Spring Budget on Wednesday 3rd March. The scheme is expected to launch in April.

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