A new UK-wide mortgage guarantee scheme to make home ownership more achievable for those with smaller deposits was unveiled in this week’s Budget.
The scheme, which is due to launch this April, will enable first time buyers and existing homeowners to secure a mortgage on homes up to £600,000 with a 5% deposit. The government will provide lenders with a guarantee on the mortgages offered, which means if the property is repossessed and sold for less than the outstanding mortgage, it will cover some of the lenders’ losses.
Mortgage products for the guarantee scheme have yet to be introduced, but the Chancellor said that major lenders including Lloyds, Natwest, Barclays, Santander and HSBC have already promised to support the scheme, with products likely to be available from next month when the guarantee scheme launches.
As part of the scheme, participating lenders must offer a five year fixed rate deal within their mortgage range, to help those who want longer term budgeting certainty.
Difficulties raising a deposit
The mortgage guarantee scheme is welcome news, as with house prices remaining stubbornly high, many buyers struggle to raise a big deposit.
According to Nationwide’s latest house price index, the average cost of a property in the UK reached a record high of £231,068 in February, after the annual rate of house price growth rebounded to 6.9%, from 6.4% in January. Someone buying a property for this amount would need to save £11,554 if they wanted to put down a 5% deposit, and £23,107 if they wanted to put down a 10% deposit.
David Postings, Chief Executive of UK Finance, the trade body for the banking industry said: “The banking and finance industry supports innovation in the mortgage market, particularly measures which enable borrowers to realise their dream of home ownership, through lower deposits. We look forward to working with the Government and lenders on helping to implement the scheme which will help many more people get onto the property ladder.”
How long will the guarantee scheme last?
The scheme will initially run until December 2022. This date has been chosen as the government believes that the current lack of high loan-to-value mortgages is “primarily a response to the pandemic rather than a symptom of a longer-term structural change in the mortgage market”.
You can learn more about raising a deposit in our guide How much deposit do I need to buy a house?
Help for homebuyers with small deposits