Article by Sam Griffin - 11th March 2021

Am I Eligible For The Mortgage Guarantee Scheme?

On 3 March, the Chancellor Rishi Sunak unveiled a new budget designed to help Britain bounce back from the economic blow dealt by Covid-19.

Among the changes was the announcement of the Mortgage Guarantee Scheme, a lifeline to many first-time home buyers who have struggled to get on the housing ladder since low deposit mortgages dried up in the face of 2020’s economic uncertainty.

But does this mean it’s any easier for those with a smaller deposit to get a mortgage?

What is the Mortgage Guarantee Scheme?

The Mortgage Guarantee Scheme is a new government programme designed to help first-time buyers obtain a mortgage.

To be eligible for the scheme, you must meet all the below criteria.

You must:

  • Be a first-time buyer
  • Have a deposit of between 5% and 9% of the property value (equivalent to LTV ratio of 91% to 95%)
  • Pass creditworthiness and affordability tests
  • Apply for a residential mortgage (rather than buy-to-let)
  • Apply for a repayment mortgage (rather than interest only)
  • Be purchasing a UK property valued at £600,000 or less
  • Apply as an individual or a couple (rather than a company)

Because the aim of the scheme is to help consumers with relatively small deposits, the government is keen to make monthly payments as predictable as possible. Under the scheme, lenders must offer at least one mortgage with a five-year fixed interest rate.

All UK mortgage lenders who provide regulated mortgage contracts will be eligible to take part in the scheme. Currently, this includes HSBC, Barclays, NatWest, Lloyds, and Santander, and more are expected to join.

As the primary purpose of the new budget is to counter the impact of the pandemic, the scheme is only temporary, running from April 2021 to December 2022. Not only is the scheme time-bound, but it’s also based on a scarcity of high LTV mortgages, which (in theory) should naturally return as the economy recovers.

This timeframe is provisional as it’s quite possible that it’ll be extended if necessary, much as the furlough scheme has.

What will the interest rates be like?

Traditionally, 95% mortgages have among the highest interest rates. Put simply, the more you borrow, the more you pay, as it’s a way for the lender to mitigate the risk involved in lending such a high proportion of the property’s value.

According to Which?, the rates on 90% mortgages are currently higher than they were before the pandemic, even with the Bank of England’s base rate being its lowest ever at 0.10%.

Importantly, your credit rating can often influence the final rate that you are offered, being more expensive for those with limited or less-than-perfect credit histories.

Does this mean I am guaranteed to get a mortgage under this scheme?

It’s important to stress that, while the scheme is called the ‘Mortgage Guarantee Scheme’, you as a borrower are not guaranteed a successful application. You still need to meet the criteria outlined above, including the all-important affordability and creditworthiness tests. The ‘guarantee’ refers to the compensation that the government will give lenders if their borrowers fall behind on payments.

This is good news because the government giving mortgage lenders financial incentives to lend to first-time home buyers should make it easier to get accepted than it otherwise would be.

Government documentation says that ‘the government will compensate the mortgage lender for a portion of the net losses suffered in the event of repossession’. Essentially, if a first-time buyer falls behind on payments and ends up having the property repossessed, the government will foot some of the bill. This is the government taking on some of the risk, which was one of the main barriers for first-time buyers, as lenders often view them with a relatively high degree of risk of missing payments.

What are the creditworthiness and affordability tests?

A successful mortgage application is almost always dependent on you passing the lender’s creditworthiness and affordability criteria, and the Mortgage Guarantee Scheme is no different. They are two distinct factors which we have written about previously.

In short, your affordability is your ability to repay what you owe each month. This can be calculated by assessing your income against outgoings, such as bills and current debt repayments.

Your creditworthiness, on the other hand, is not concerned with your wealth or income. Instead, it’s your likelihood of managing the account well, based largely on your repayment history on other credit agreements. For instance, a borrower who has never missed a monthly payment will likely be viewed as highly creditworthy.

Lenders will determine your creditworthiness by assessing the information found on your Credit Report, which will include your credit agreements, their repayment history, any court records, individuals you are associated with, and much more.

How can I improve my chances of getting a 95% mortgage?

A 95%, government-backed mortgage isn’t particularly different to standard mortgage products in terms of the steps you should take to improve your chances of being accepted.

Planning well ahead is key. It’s no good waiting until you need a mortgage offer before checking for yourself what your Credit Report looks like and what information a lender is likely to make a decision on.

Should you find anything that needs updating or correcting, it can take a number of weeks for changes to be reflected and could lead to delays – potentially seeing you lose out on your mortgage offer (with the number of 95% products expected to be limited). Instead, by checking your Credit Report well ahead of when you’re ready to apply for a decision in principle or formal mortgage offer, you’ll have time to correct errors and ensure that everything is as good as it can be.

How do I check what’s on my Credit Report?

You can see the data that lenders will see during a credit check by viewing your Credit Report for yourself. As there are multiple Credit Reference Agencies (and you can’t be sure which ones will be checked), it’s a good idea to check them all long before submitting your application. This way, you can know for certain what information is on your Credit Report and how it may influence your application. It’ll also give you the chance to put right any errors which, while rare, do happen.

checkmyfile makes the process of checking your Credit Report data across Equifax, Experian, TransUnion, and Crediva quick and easy. Our Multi Agency Credit Report gathers your information from all four UK Credit Reference Agencies onto the same, easy-to-use platform, saving you time and giving you peace of mind. If you need any help, our Expert Help is just a click away and we can raise disputes on your behalf, wherever needed.

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