Purchasing property is a significant financial decision that often requires substantial financial planning and saving. For many prospective buyers, gathering a large deposit is frequently the most challenging aspect of the process. That’s where the UK government’s Mortgage Guarantee Scheme comes into play. This scheme is designed to support those looking to buy homes but struggling to save enough for a hefty deposit. It’s a significant step by the UK government to boost the housing market and provide a much-needed leg up to first-time buyers and existing homeowners alike. But how does it work? And how can it help aspiring homeowners take that crucial first step onto the property ladder?
Let’s delve into the specifics and benefits of this scheme.
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The Mortgage Guarantee Scheme: A Breakdown
Introduced by the UK government, the Mortgage Guarantee Scheme is designed to stimulate the property market by making mortgages more accessible to people unable to save large deposits. It encourages mortgage lenders to provide mortgages covering up to 95% of a property’s value, with the government offering a partial guarantee on these high loan-to-value mortgages.
Lenders are often hesitant to offer these types of mortgages because of the increased risk involved. If a buyer defaults on the loan, the lender stands to lose a more substantial amount of money. However, the Mortgage Guarantee Scheme mitigates some of this risk for the lender, making them more inclined to offer these high loan-to-value mortgages to potential buyers.
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The scheme doesn’t directly provide buyers with any additional funds. Instead, it facilitates access to broader mortgage options, enabling buyers to find a suitable mortgage with a smaller deposit.
Application Process and Eligibility
Now that you have an understanding of what the Mortgage Guarantee Scheme is, let’s look at how to apply and who is eligible.
The scheme started on 19th April 2021 and is expected to run until December 2022. The application process follows the standard mortgage application procedure. Prospective buyers fill out an application with a participating lender, who then examines the applicant’s creditworthiness and affordability.
The scheme is available to UK residents purchasing a property valued at £600,000 or less, intending to live in the property, i.e., not buy-to-let. It applies to both first-time buyers and existing homeowners looking to move up the property ladder. People purchasing a new-build property are also eligible for the scheme.
This scheme is an excellent opportunity for those of you who have long desired to own a home but have struggled to save for a large deposit.
How the Scheme Benefits Buyers
The Mortgage Guarantee Scheme offers several advantages to you, the potential property buyer. The most apparent benefit is that it allows you to buy a property with a deposit of just 5%, making homeownership a reality for many who previously found it unattainable.
The scheme also expands the range of properties you can consider. Without the scheme, a small deposit might limit you to less desirable properties. However, with access to larger mortgages, you can aim higher and find a property that truly meets your needs.
Additionally, the scheme could potentially save you money over the long term. You might have been considering saving for several more years to accumulate a larger deposit. But with property prices increasing over time, the property you desire could become more expensive, negating the benefits of a larger deposit.
The Role of Lenders
While the Mortgage Guarantee Scheme is a boon for prospective buyers, it’s also crucial to understand the lender’s role in this scheme. The scheme provides security to lenders who offer high loan-to-value mortgages. This assurance comes in the form of a government guarantee on a portion of the loan.
This means that if a borrower defaults on the mortgage, the government will cover a portion of the lender’s losses. This guarantee reduces the risk for lenders and incentivizes them to offer 95% mortgages.
However, lenders still perform regular affordability checks and follow the same stringent lending criteria. The scheme does not bypass this critical part of the loan approval process, ensuring that mortgages are only approved for buyers who can afford the repayments.
The Impact of the Scheme on the Housing Market
The Mortgage Guarantee Scheme is anticipated to have a substantial impact on the UK housing market. With more buyers able to access mortgages, increased demand could lead to a rise in property prices.
The scheme also aims to stimulate the building industry. With an increased demand for homes, there’s an expectation that construction firms will build more properties, contributing to economic growth.
However, it’s crucial for you, the buyer, to consider the potential implications of the scheme. While it makes homeownership more accessible, it could potentially lead to higher property prices and increased mortgage repayments. Therefore, it is highly recommended to carefully consider your financial situation and conduct thorough market research before making a decision.
The Various Mortgage Deals Available Through the Scheme
The Mortgage Guarantee Scheme supports a multitude of mortgage deals for potential homeowners. These mortgage deals are not restricted to specific fixed-rate mortgage offers, giving you a broad selection of options when considering which mortgage to choose.
The scheme covers all types of residential mortgage products offered by participating lenders, meaning you can choose from a vast array of mortgage rates and repayment terms to suit your individual circumstances. Whether you prefer a two, three, five, or even a ten-year fixed rate deal, the Mortgage Guarantee Scheme allows you to apply for whichever mortgage deal you favour.
However, remember that mortgage lenders still have the final say on the mortgage deals they offer. This means that the available mortgage deals will differ from lender to lender, depending on their individual risk assessments and business models. So, it’s in your best interest to shop around and speak with different lenders or consult a mortgage broker to find the best mortgage deal for your circumstances.
Moreover, the scheme is not applicable to all mortgage products. For instance, the shared ownership and Help to Buy schemes are not covered under the Mortgage Guarantee Scheme. As such, it’s essential for you to consider all available options and make an informed decision of which path to homeownership suits you best.
The Future of the Mortgage Guarantee Scheme
The Mortgage Guarantee Scheme represents a significant intervention by the UK government to aid first-time buyers and existing homeowners onto the property ladder. It’s a clear response to the challenges faced by many prospective buyers who struggle to amass a sufficient deposit to secure a mortgage for their desired property.
While the scheme is currently set to run until December 2022, it’s possible that it may be extended or replaced with a similar initiative, depending on its success and the state of the UK housing market. It’s worth noting, however, that the guarantee provided by the government does not limit the potential for fluctuations in mortgage rates, which are subject to a range of factors including interest rates set by the Bank of England.
As with any financial decision, it’s always a good idea to carefully weigh the pros and cons. Although the scheme makes homeownership more accessible, it’s important to consider the implications of taking on a high loan-to-value mortgage. Borrowers must still be able to afford the repayments and should be prepared for the possibility of interest rate rises in the future.
In conclusion, the Mortgage Guarantee Scheme has been introduced to help more people climb onto the property ladder with a smaller deposit. It offers a variety of mortgage deals, from fixed-rate to variable, provides security to lenders, and stimulates the housing market. However, like with any financial decision, careful consideration and research should be undertaken before proceeding.
