The 95% mortgage guarantee scheme explained

Buying a house with the 95% government guarantee scheme

Introduced in April 2021, the 95% mortgage scheme was created to enable buyers with smaller deposits to purchase a home. In this article, we discuss the following:

What is the 95% government mortgage scheme?

Launched on 1st April 2021, the 95% mortgage scheme was introduced to help buyers who only had a 5% deposit to get on the property ladder. Prior to the pandemic, many banks would offer 95% mortgages, but nearly all were removed during the lockdown (to put this into context, there were 391 offers at the beginning of 2020, but during the pandemic, there was just 3) .

This particular scheme is a guarantee from the government that they will partially compensate a lender, should the borrower default on their mortgage – helping to reduce the risk for the lender.

This is very similar to the help to buy mortgage guarantee scheme, which ended in March 2020. This required buyers to put down a 5% deposit, with the government having a 20% equity share of the house (increasing to 40% in London).

Currently, the 95% government mortgage scheme is due to end on 31st December 2022, although it will be reviewed before then, with the possibility of it being extended.

Who is eligible for the 95% mortgage?

Available for both first-time buyers and home movers, there are a few new mortgage rules you’ll need to follow, in order to be accepted:

  • The property must be for you to live in yourself – that means it can’t be a buy-to-let property, or one that will be used as a second home.
  • The property must have a purchase value of £600,000 or less.
  • You must apply for a repayment mortgage, rather than interest only; and have proof that you can afford the repayments.
  • The mortgage must be taken out by an individual, or a group of individuals, as opposed to a company.
  • The mortgage must be for 91%-95% of the property’s value; which means your deposit must be between 5%-9% of the property’s value.

As the buyer, the way in which this mortgage scheme looks is no difference to if you were to just take out a 95% mortgage another way – it just makes it less risky for lenders to get involved.

Which lenders are offering the 95% mortgage guarantee scheme?

Several major banks now offer 95% mortgages under the government’s guarantee scheme, including NatWest, HSBC, Santander, Barclays and Lloyds Bank.

The mortgages these lenders will offer will be set at a five-year fixed rate – which is mainly a benefit for the lender, as they’ll have a longer-term security of predicted payments.

The benefits of the 95% government mortgage scheme for buyers

The 95% mortgage scheme has several benefits for buyers – we’ve listed a couple below:

It helps you get on the ladder

For many buyers with small deposits, it was near-impossible to get on the property ladder during the pandemic, because the majority of lenders removed the ability to be accepted for a 95% mortgage. This scheme has brought them back, which means not only first-time buyers can benefit from them, but home movers too. For home movers especially, it opens up more expensive property for them, which frees up affordable housing for those looking to buy their first home.

It’s available for a wide range of circumstances

Available to first-time buyers and home movers, for properties at £600,000 and less (the average cost of a property in England is £256,400, so there’s a lot of leeway here), on both new build and existing houses (although some lenders are implementing their own restrictions on this), there’s nearly no limit to the type of property that can be eligible on the scheme – as long as it’s going to be lived in by the person buying it.

The drawbacks of the 95% mortgage scheme for buyers

Of course, there can’t be benefits without drawbacks. Before signing up for a 95% mortgage under the guarantee scheme, make sure you take these things into account:

A smaller deposit still means higher repayments

Whilst they’re a great option if you’re unable to save for a higher deposit; ultimately, your monthly repayments will be higher than if you could put down a 10% deposit – so should only be used if you can’t push your deposit slightly higher.

Be careful thinking they’re the ‘best’ mortgages

Whilst the 95% mortgage guarantee scheme was introduced to make it easier for buyers with low deposits to get on the housing ladder, it was also created as an incentive for lenders, in that they had some guarantee of payments from the government, should buyers not be able to keep up their repayments. Bear in mind that there are plenty of 95% mortgages available outside the scheme, so keep your options over and look to see where the best interest rates are before committing.

How to apply for a 95% mortgage on the government’s guarantee scheme

If you want to apply for a 95% mortgage under the scheme, then you’ll follow the exact same process you would for a regular mortgage. You can either apply to lenders separately, or work with a mortgage advisor who can take care of the process for you, and help point you in the direction of the best mortgage for your specific situation.

Alternatively, if you’re a home mover, and you’ve found your dream home, been accepted for a 95% mortgage, and want to sell your house fast, then we can help! Get in touch with us today to find out more, or alternatively, for more home selling and buying inspiration, head on over to our blog.

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