The scheme is aimed to increase the appetite of lenders to lend at higher loan to value. Since the pandemic, lenders have restricted the availability of low deposit mortgages mainly due to an anticipation that house prices would slump as a result of the Corona Virus impact.
A similar scheme launched in 2013 following the financial crisis in 2008 was a success and this scheme appears to mirror the characteristics of that of 2008.
Scheme Mechanics
The Government will give lenders the option to purchase a guarantee on the “top slice” of the mortgage. This means that the Government will compensate the lender for a portion of the net losses suffered in the event of repossession. Lenders will also take a 5% share of those net losses. The guarantee will be valid for up to seven years after the mortgage originated, as evidence shows that after this period loans are less likely to default. The lender will pay a commercial fee to the Government for each mortgage in the scheme. Additionally, the scheme will be administered by National Savings and Investments on behalf of the Treasury. There is a cap on the Government’s contingent liability under the scheme of £3.9bn.
Eligibility for the Mortgage Guarantee Scheme
Below we have listed the criteria required to be eligible for the latest scheme:
- Owner occupier mortgage only (not second homes or buy to let)
- Only available to individuals and not an incorporated body
- UK property only up to a max purchase price of £600K
- Have a loan to value between 91-95%
- Be originated in the scheme between April 2021 and December 2022
- Only repayment and no interest only
- Meet standard affordability tests and credit score passing – not suitable for clients with credit problems
Our Thoughts on this Scheme
The scheme will certainly benefit first time buyers and continue to stimulate the housing market, allowing chains to form for next time buyers. We may find the benefits regionalised, with particular benefit for lower cost housing. A consideration would need to be made to the size of the mortgage given such a small deposit, for example – a £300,000 2 bedroom flat in South London would require a mortgage of £285,000 which based on an income multiple of 4.5x, a single applicant would need to earn in excess of £60,000.
We asked Robin Hawke, Partner at Hawke Financial Services, for his opinion on the scheme given the current state of the property market and projected forecasts for changes in the coming months.
“With the polarised affects of lockdown on different business sectors the property market has continued for those unaffected by the Covid measures. The government scheme can only help subsist in the aftermath of the pandemic. Whilst it won’t help everyone it most certainly will have some positive effects on preventing a property price slump and feeding the wider economy.“
Get In Touch For More Information on the Mortgage Guarantee Scheme
To find out more about the Mortgage Guarantee Scheme get in touch with a member of our team today.