Pre-Budget Update – New Mortgage Guarantee Scheme

On Wednesday, the Chancellor Rishi Sunak will announce this year’s budget and as Budgets go, this one could be quite interesting.

The question on the lips of many people is how he plans to repay the astronomical cost of the various government support schemes introduced over the past year to assist individuals and business cope through the pandemic. According to news sources, it is expected that he will announce a dedicated until to crack down on fraudulent claims for these support grants and loans, as well as providing more funding for apprenticeships in a bid to stave off the inevitable rise in unemployment – especially amongst the younger working population.

But his plans also include a Mortgage Guarantee Scheme aimed at helping aspiring homeowner get onto the property ladder with small deposits and unlike previous ‘help to buy’ schemes, this one is set to be open to both first time buyers and current homeowners.

Under the Mortgage Guarantee Scheme (which will be subject to the usual affordability checks) buyers will be able to purchase properties worth up to £600,000 with a deposit of just 5% and it will be available to lenders from April. This will mean a return of low deposit mortgages in the market.

Since the overall tightening of lending criteria, lenders are now generally less likely to approve mortgages when a small deposit is put down, due to fears the home buyers will not be able to pay the full amount back and the economic impacts of the coronavirus pandemic mean that low-deposit mortgages have “virtually disappeared”, according to the Treasury.

How will it work?

The government plans to incentivise lenders to provide these low-deposit mortgages by offering them the guarantee they require to provide mortgages covering the remaining 95%.

Prime Minister Boris Johnson said the plans are to help “generation rent to become generation buy”, adding: “Young people shouldn’t feel excluded from the chance of owning their own home and now it will be easier than ever to get onto the property ladder.”

The new Mortgage Guarantee Scheme differs from the Higher Lending Charge (HLC) that is attached to some mortgages. This is an additional charge made by the lender if the mortgage has a high loan-to-value. It’s designed to cover any increased risk the lender might incur; they may use it to buy an insurance policy called a Mortgage Indemnity Guarantee, which protects them if the borrower defaults on the mortgage. Although the cost of the HLC is borne by the borrower (usually paid on completion, but sometimes can be added to the mortgage balance) the protection is for the lender and in some cases this charge is quite a chunk (say 8% on all money advanced over 75%).

Turning ‘generation rent’ into ‘generation buy’ has been a focus for Boris Johnson for a while so the return of 95 per cent loan-to-value mortgages for first-time buyers doesn’t come as a complete surprise. This, coupled with the extension of the stamp duty holiday, is a step towards helping more people fulfil their dream of owning their own home – which has to be a good thing.

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