Earlier this week, Chancellor Rachel Reeves unveiled the government’s new Mortgage Guarantee Scheme, which it says will be a permanent fixture to enhance the housing market.
Stumping up a large deposit when the cost of living as well as the cost of property in the UK is high relative to wages has been a major barrier for homeowners and movers alike.
The Mortgage Guarantee Scheme aims to alleviate affordability issues by allowing lenders to offer government-backed 95% loan-to-value (LTV) mortgages – meaning buyers will need just a 5% deposit to purchase a home.
While much of the discussion on the new scheme has centred around helping first-time buyers onto the property ladder, the Mortgage Guarantee Scheme isn’t just for them. Anyone moving house may be able to benefit, unlocking potential homes that may otherwise have been out of reach.
The scheme actually replaces a similar one that was brought in by the previous government back in 2021, and ended last month.
It comes as lenders have also been allowed to relax their strict lending rules, meaning the loan-to-income ratio has been pushed higher in certain cases so that buyers can borrow greater amounts.
What about buy-to-let landlords?
According to government papers, buy-to-let mortgages do not qualify to take advantage of the Mortgage Guarantee Scheme. Borrowers must not be granted consent to let by the lender, and at least one if the co-owners (where there is more than one owner) must be planning to live in the property once bought.
This means landlords will still need a larger deposit than homeowners do in most cases. The standard LTV limit for most buy-to-let lenders is 75% (requiring a 25% deposit), although some lenders may offer higher LTVs depending on the market.
However, the larger your deposit, the better mortgage deal you can normally secure, whether standard residential or buy-to-let. The best rates are available at 60% LTV or lower.
According to Moneyfactscompare, some lenders are offering sub-3% deals on certain buy-to-let mortgage products, which tend to be those with lower LTVs. The Mortgage Works is particularly competitive in the space, with mortgage rates as low as 2.79%.
Will the Mortgage Guarantee Scheme spur on the housing market?
The Mortgage Guarantee Scheme is being introduced at a time when mortgage rates have begun falling once more, and the Bank of England Base rate is a percentage point lower than when it was at its peak of 5.25%.
With above-expected inflation and a slight contraction in the UK economy in the latest results, it’s hard to say what the next decision will be from the Monetary Policy Committee next month – but analysts are leaning towards a base rate cut.
At the same time, buyer appetite remains high according to recent reports, while more sellers are coming to the market creating both choice and a better stance for negotiation.
Generally, the industry has welcomed the Mortgage Guarantee Scheme as a way of further boosting this demand in the sector and creating more positive momentum, as it puts a wider range of properties on the table for thousands of people.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, said: “This scheme, along with lenders relaxing stress tests and the ongoing considerations about loan-to-income rules, is a great combination for first-time buyers struggling to afford a mortgage.”
However, she also warns that those taking advantage of the Mortgage Guarantee Scheme will also have much lower equity in their homes, which could pose a greater risk if house prices don’t perform well.
“Therefore, seeking advice before entering any arrangement is vital, especially to ensure a deal is picked based on a competitive rate, fees and incentives,” she added.
Others have criticised the scheme as being introduced “too late”, with many lenders already offering higher LTV mortgages which are not backed by the government.
Peter Stimson, director of mortgages at lender MPowered Mortgages, said: “The mortgage market has changed a lot since Rachel Reeves swept into 11 Downing Street last July.
“The Base Rate has come down by a full percentage point and hundreds of 95% LTV mortgage products are now available.
“Every lender who wanted to offer a 95% loan is probably already doing so.
“The Chancellor’s announcement is unlikely to make dozens more suddenly follow suit – as the price of entry is unknown and will vary each year.”
