During the Covid-19 pandemic of 2020 and in to 2021, mortgage lenders reduced their mortgage offerings for 95% loan-to-value mortgages to such an extent that they were almost non-existent on the market. This made it really hard for people, especially first time buyers, to access mortgages without a significantly larger deposit than previously.
What is the Mortgage guarantee scheme?
The scheme was first introduced in April 2021 in response to Mortgage lenders removing almost all the 95% mortgages from the market in the wake of the Covid-19 pandemic. It was reported that in April 2021 there were only 8 95% LTV products on the entire mortgage market compared to over 386 products available before the pandemic started. During that time millions of people took mortgage payment holidays, which reduced the cash flow in the mortgage market. Added to this many people were furloughed or made redundant which made lending, in the eyes of the lenders, riskier. As such they moved towards the higher deposit, lower risk lending practice. This made it very difficult for many people to buy a property, especially first time buyers.
The mortgage guarantee scheme was a scheme introduced by the Government which the Government offered lender a financial guarantee for the portion over the loan over 80%. So, if the home buyer defaulted on their mortgage, the Government would compensate the lender for the portion over 80% of the loan. This essentially covered 95% of the lender’s potential losses. The scheme only applied to 91% to 95% loans offered to buyers on properties up to £600,000 and on the condition that the buyer passed all the normal affordability checks, was buying their only property (not open for buy-to-let or second home mortgages) and repayment mortgages (interest only mortgages were not covered). Once a mortgage was taken out using the scheme, the guarantee lasted for 7 years.
Over the last 2 years the scheme has helped over 24,000 households purchase a property, of which 85% were first time buyers.
The scheme was due to end in December 2022 for new mortgage applications but on the 20th December 2022 the Government announced that it was extending the scheme until December 2023. In making the announcement the Chief Secretary to the Treasury, John Glen MP said “For hard-working families facing today’s challenging economic conditions, it’s right that we continue to help them secure their first home or move into their dream house. Extending this scheme means thousands more have the chance to benefit, and supports the market as we navigate through these difficult times.”
The main advantage of the scheme is that it has absolutely no noticeable impact on the home buyer. They will, as is always the case, need to be able to afford the property and pass the affordability and credit checks. Other than that, it is the lender who needs to apply for the scheme. The extension of the scheme, especially in the current financial climate is a welcome relief to many.
