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Government’s 95% mortgage scheme: Everything you need to know

06/05/2021

Creditfix > Blog > Creditfix Debt Help Blog > Government’s 95% mortgage scheme: Everything you need to know

 

With house prices soaring during the pandemic, the Government has recently launched a new 95% mortgage scheme to help both first-time buyers and existing homeowners move up the property ladder.

In this blog we’ll tell you everything you need to know about the scheme, including what a 95% mortgage is, how the scheme works, and whether you’re eligible.

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What is a 95% mortgage?

You will be familiar with the concept of mortgages – money you borrow from a lender and pay back over time as a way of purchasing a property.

What you may not know is that mortgages operate differently depending on the size of deposit you put down. In theory, the bigger the deposit you put down upfront, the less you need to borrow, and thus the more likely you are to be accepted for a mortgage.

That means if you put down a deposit that’s equivalent to 20% of the value of the property, the amount you borrow from a lender will represent 80% of the value of the property – thus you’ll have an 80% mortgage.

With this in mind, a 95% mortgage is a mortgage that allows you to borrow 95% of the value of the property, while you only have to pay 5% upfront.

How does the Government’s 95% mortgage scheme work?

The way the scheme works is relatively simple. With the 95% mortgage guarantee, anyone buying a home valued at less than £600,000 can do so with just a 5% deposit. This includes both first-time buyers and existing homeowners.

The scheme also comes with a guarantee from the Government. This gives lenders more confidence about taking on low-deposit borrowers, who are traditionally more likely to default on payments for properties that stretch the limits of what they can afford.

If the borrower defaults, the scheme will see the Government accept partial liability of around 15%, meaning the lender will be compensated for at least a portion of the defaulted payments.

Why was the scheme launched?

The main reason the scheme was launched is to help first-time buyers get on the property market, by lowering the amount they have to save towards a deposit.

House prices have been rising for decades, making it more and more difficult for first-time buyers to save for the size of deposit they need to be accepted for a mortgage.

Young people striving to buy their first home also disproportionately find themselves in insecure jobs, and are often forced to spend 40% of their income or more on expensive rental properties.

Another reason for the launch of the scheme was to help existing homeowners who can’t afford to upgrade. During the coronavirus pandemic, house prices hit a record high, at the same time as many of us found ourselves unable to leave our homes.

For existing homeowners, especially those with kids, the pandemic opened up their eyes to the need to upgrade, but even as we ease our way out of covid restrictions in the UK, the house price bubble is showing no signs of bursting.

The 95% mortgage scheme will attempt to lower the barrier to buying property for first-time buyers, as well as making it more affordable for existing homeowners to buy a bigger property more suited to their needs.

Am I eligible for a 95% mortgage under the scheme?

Whether you’re a first-time buyer or existing homeowner, there are certain criteria that you will have to meet before you can apply for a 95% mortgage under the scheme.

In order to do so, you must:

– Be a first-time buyer or existing homeowner
– Be buying a property to live in yourself (no second homes or buy-to-let properties)
– Be buying a property for less than £600,000
– Be applying for a repayment mortgage, rather than interest-only
– Be applying for a mortgage the equivalent of 91% to 95% of the value of the property you’re buying

The scheme is initially due to run until 31st December 2022, although it will be reevaluated and may eventually be extended.

How does the scheme help me get on the property ladder?

While 95% mortgages were available pre-pandemic, they were rare. Once the pandemic hit, the uncertainty it caused to the housing market led every lender and mortgage broker to withdraw 95% mortgages entirely.

With the Government guarantee, lenders have been given the confidence to begin offering 95% mortgages again, as the Government will be taking on some of the risk.

As long as you fit the criteria, the scheme allows you easier access to low-deposit, Government-guaranteed mortgages, and means you can get on the property ladder (or move up a rung if you’re an existing homeowner) without having to save for a huge lump-sum payment.

Where can I find out more?

You can find out more about the 95% mortgage scheme, including more background on the scheme and the list of eligibility criteria, by visiting the gov.uk website here.

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