Today in the Budget the UK Government announced it would be introducing the mortgage guarantee scheme to help people, both first time buyers and people wanting to move home access 95% loan to value mortgages.
In the budget statement Rishi Sunak has announced plans to introduce a scheme to support lenders so they can offer higher loan to value mortgages for more buyers.
This includes both first time buyers and people wishing to move home as well. Under the new scheme, it will be possible to pay a small deposit of 5% whilst borrowing the difference of 95% from a lender. Initially this will be Lloyds banking group which includes Halifax, Barclays, Santander, HSBC, NatWest with other lenders likely to follow suit. The government are going to guarantee or ‘underwrite’ a proportion of the loan & this is called a ‘Mortgage indemnity Guarantee’ or MIG for short.
Why are the Government doing this?
When the pandemic struck early in March 2020, initially, there was good availability of 95% loan-to-value mortgages still available. However we saw a dramatic reduction during the COVID-19 pandemic, mainly due to the economic uncertainty that was brought about as a result of the lockdown and effective shutdown of our economy. Given that we have not seen such a significant event which has altered the course and nature of our stable economy in peace time, it was only natural that mortgage lenders would become worried about giving out mortgages to people with small deposits.
So why would mortgage lenders be worried about 95% mortgages? The answer to this is quite simple to explain. As the economy has had such a brutal shock due to COVID this has meant, sadly, some people have lost their jobs; if they still have their jobs they may have suffered a reduction in income and tragically, many households may have lost an income altogether in the worst case scenarios.
As our Gross Domestic Product (GDP) shrank due to the reduction in what is called aggregate demand (AG) – basically people unable to go out and buy goods and services – it lead many financial institutions thinking and fearing the worst which is; if people have lost their jobs and can’t afford their mortgages and we need to repossess homes, who will buy them?
Of course, whenever there is an oversupply of something the price goes down, that bit is just basic economics. The result of this may have been that houses prices dropped nationally, and at certain points during the pandemic, it was bandied about by various parties who were trying to financially model the impact of COVID, that we may see house price reductions of up to 19% in some scenarios (thankfully this hasn’t come to pass).
Now, if house prices had fallen and mortgage lenders had continued to offer mortgages where buyers only had a 5% deposit, if, for example, the house prices had reduced by just 6%, it may have meant that thousands of homeowners were pushed into ‘negative equity’ whereby the house is worth less than the loan secured against it. In that scenario if a mortgage lender needs to repossess they may not get their money back if the asset (the home) is now being sold for less than the mortgage amount loaned/secured against it.
Of course, I’m sure you’re thinking ‘well so what, the banks take a risk, who cares if they lose a few pounds’. Unfortunately in the UK, repossession isn’t quite that simple. In the event that a house is taken back (repossessed) by a mortgage lender, and the property sold, if there is still a mortgage debt which hasn’t been cleared, the debt isn’t written off, it carries on and the borrower may find themselves still paying for a mortgage when they no longer have a home. Now, as banks and building societies want to maintain as good a reputation as possible and also to protect borrowers they removed the ability to buy with a 5% deposit to stop people getting into a situation they may have found they couldn’t get out from.
So Why Are They Doing Something Now?
The housing market is incredibly reliant upon first time buyers, it always has been and always will be. This is because, unless there are new buyers that come in at the bottom rung of the ladder it stops people from moving up the property ladder as they can’t sell their home to buy the next one – this carries on all the way up the chain to the top. As you can imagine, if the amount of first time buyers reduces because they can’t get the finance or mortgages to be able to buy their first homes, then it causes the entire property market to seize up. This can have very serious effects as one of the main drivers of the UK economy is property and construction. The next problem on the list is that, as rents are so high most people struggle to save up deposits that allow them to buy their first home. According to a recent Bank of England report, around 75% of renters are likely to be constrained by a lack of sufficient savings to meet deposit requirements, rather than by the affordability of repayments they’d need to make on a mortgage. As you can see we were creating a double problem, rents rising, deposits needing to be higher and first time buyers drying up and unable to keep the whole thing turning; this is the reason why the Government have stepped in to try and alleviate things.
So How Will It Work?
The government are simply acting as an insurer for the big banks so that they feel comfortable to lend at 95% LTV. This means that the mortgage lender will loan 95% of the property value on a mortgage, and the UK government will take on part of the risk of default for the bank so that they don’t have to worry about negative equity and getting their money back. This will have a big effect for the housing market as if there is suddenly lots of people who want to buy homes and have a 5% deposit it will allow parties further up the housing ladder to be able to market, sell and move as well. First time buyers & 5% deposit mortgages act like oil in the engine of the property market; they keep the whole machine turning.
So What Are The Eligibility Requirements?
The scheme is designed to help creditworthy (read excellent credit score and clean credit history) households struggling to save for the higher mortgage deposits needed by lenders in the current environment. For this reason, a mortgage eligible for a guarantee under the scheme will need to:
· be a residential mortgage (not second homes) and not buy-to-let
· be taken out by an individual or individuals rather than an incorporated company
· be on a property in the UK with purchase value of £600,000 or less
· have a loan-to-value of between 91 per cent and 95 per cent
· be originated between the dates specified by the scheme
· be a repayment mortgage and not interest-only and
· meet standard requirements in terms of the assessment of the borrower’s ability to pay the mortgage, for example a loan-to-income and credit score test
Now of course this is only a temporary scheme to help things get back to normal, now that we are hopefully seeing the start of the end of COVID & although the government have said it’ll run from April 2021 to December 2022 it’s likely the government will review the continuing need for the scheme towards the planned end date, and determine whether extending the period of eligibility for new mortgages would continue to deliver benefits for prospective homeowners.
What Should You Do About It?
If you are thinking of buying a new home or moving home and want to talk about this scheme, then of course you should always take professional mortgage advice from an appropriately qualified expert mortgage adviser.What shoud I expect if I make an enquiry? If you’re wanting to know about this and all the ins and outs then what we’d recommend is to book a call to discuss your circumstances and let us assess your eligibilty, afetr all, it is more complex than it seems. We’ll need to ask a lot of questions about your income and outgoings, address and work history; we’ll certainly want you to complete our credit file check (wait until we ask rather than rushing off and doing it now). Once we’ve done that we can assess how much you’ll be able to borrow, on what terms and how that will cost, along with the likelhood of being approved for this type of mortgage.
If you have found this blog useful, please do us a favour and share it on social media, and if you want to book a call then pop an enquiry in by clicking here and we’ll arrange a time and date to start the process
Take care, stay safe and we look forward to meeting you 🙂
