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Explained: the government’s 95% LTV mortgage guarantee scheme

The government has launched a new scheme to help home buyers with small deposits get on the property ladder. Here’s how it works.

The 95% LTV mortgage guarantee scheme - mortgage application with 'approved' stamp

The 95% LTV mortgage guarantee scheme means first time or current homeowners looking to buy a house of up to £600,000 will need a deposit of just 5% per cent.

What is the 95% LTV mortgage guarantee scheme?

The mortgage guarantee scheme was announced by the Chancellor of the Exchequer Rishi Sunak in his latest Budget.

It means first-time buyers or current homeowners looking to buy a house of up to £600,000 will need a deposit of just 5% per cent to secure a mortgage. 

The government will guarantee the remaining 95% so that lenders are not at risk if the borrower cannot keep up their mortgage repayments.

Mr Sunak says he wants to get tens of thousands of people onto the property ladder and “turn generation rent into generation buy”.

Why is the 95% LTV mortgage guarantee scheme needed?

The scheme is part of a larger Covid-19 support package, worth £352bn. 

High loan to value (LTV) mortgages, 95% LTV mortgages, have almost disappeared during the pandemic, in February 2021 there were just eight mortgage products offering an LTV of 95%.

The package includes other measures such as extending the furlough scheme and the Stamp Duty holiday as the UK economy recovers from the coronavirus pandemic of 2020/ 2021.

Maria Fadeeva, mortgage director, Hoxton Property says: “The scheme is aimed at  stimulating riskier lending to borrowers with smaller deposits by guaranteeing the loan repayment to the lenders.”

“This means lenders are more prepared to help those with small deposits because the government will guarantee up to a certain percentage of the price in case the buyer defaults.”

Can only first time buyers get a government-backed 95% LTV mortgage?

The scheme is also aimed at home-owners looking to move, who cannot afford more than a 5% deposit.

First-time buyers tend to struggle more with getting a mortgage because homeowners can use equity built up in a home to move or remortgage.

How difficult is it to get a 95% LTV mortgage if I am a first time buyer?

Getting a 95% LTV mortgage has become more of a challenge because of the pandemic.

Ms Fadeeva says the median salary for a full time employee in the UK is £31,461.

She explains: “With only 10% of the working population earning more than £62,589 per year, and household spending being £30,451 per annum it is easy to see that saving a considerable amount for a deposit takes a long time, leaving many to buy much later in life.”

Is this scheme the same as Help to Buy?

The latest scheme is similar to the Help to Buy Mortgage Guarantee scheme, which ran from 2013 to 2016. 

An estimated 90,000 borrowers took advantage of HTB under which 10 lenders offered government-guaranteed 95% loans for borrowers able to put down a 5% deposit.

The other Help to Buy scheme, the Equity Loan allows first time buyers to get help with their deposit on a new build home via a government loan scheme. 

In return for putting up a 5% deposit the government will chip in with another 20% (or 40% in London). In return the government own a percentage of the property until it is sold or the mortgage paid off.

How does the government 95% mortgage guarantee scheme work?

John and Sarah

John and Sarah need to move out of their one-bedroom rented flat as Sarah is pregnant.

They have £15,000 saved towards a deposit but two-bedroom flats where they live - which is near where both of them work - are selling for £300,000.

Under the government scheme they will be able to get a mortgage of £295,000 because they have saved up at least 5% deposit, £15,000. 

They will still need to be able to prove they can repay the mortgage itself, with or without a deposit.


Katie

Katie bought a house for £500,000 with a mortgage of £475,000 2 years ago. But Katie has just lost her job and can no longer afford the mortgage repayments. 

The bank has no other choice but to repossess the house and sell it to retrieve the remaining loan of £440,000.

Unfortunately, house prices in her area have fallen over the last 2 years, and the home is now only worth £420,000. 

The 95% LTV guarantee means that the government will pay the bank the difference between the money owed by Katie and the amount the house was sold for.

How do I sign up to the scheme?

The lending scheme will be made available in April. Lenders that have signed up to offer it so far include the UK’s major mortgage lenders: Barclays, Santander, HSBC and Lloyds.

Will the scheme make homes more affordable?  

There are many reasons why the price of buying a home has risen in recent years.

These include:

  • Supply and demand - not enough houses are being build

  • Demographics - an ageing population 

  • Trends  - younger people are choosing to live and buy on their own 

  • Borrowing - low interest rates mean mortgages are cheaper to pay back

  • Interest rates - because savings are not paying much a lot of older people are investing their pension and savings in a second home or buy to let property

Tim Bennett, head of education at Killik & Co says the 95% mortgage scheme would “add more fuel on the property fire”. 

He says: “The combination of an extension to the Stamp Duty holiday and the government-backed 5% deposit scheme will do little to help first time property buyers – since neither measure is limited to them.”

Bennett believes that encouraging banks to offer low deposit mortgage deals means nothing is being done to solve the problem of a lack of affordable homes.

“It is merely helping to inflate the price of existing housing stock by increasing buying power. This can only serve to keep property prices rising, at seemingly almost any cost.”

Neil Weston, principal of Scout Financial Services, said many first-time buyers had saved a deposit but would still not be able to get a mortgage because they had been furloughed.

“Recent Treasury figures indicate a total of 4.7 million Brits remain furloughed, many of whom are would-be first time buyers in sectors such as retail, travel and hospitality.”

Dean Clifford, co-founder, Great Marlborough Estates, says: "Yet encouraging banks to lend to first-time buyers can only ever be part of the solution. Too much demand-side stimulus without increasing supply risks stoking an unsustainable housing bubble. 

"The bigger picture involves increasing housing delivery across the board which can only be achieved by having a better resourced and designed planning system." 

Can I buy with the government-backed mortgage guarantee scheme?

Whether you have a deposit or not you will still need to be able to afford the mortgage. 

Nigel Purves is chief executive of Wayhome, an organisation that helps first time buyers on to the property ladder. He says that the average house price in England is just under £270,000.

“So you’ll still need quite a hefty household income to get a 95% mortgage to afford to buy it.”

Wayhome estimates that the average first-time buyer will still need to earn over £40,000 a year.

House Price5% DepositMortgage amount*Average income needed to get this mortgage
£150,000£7,500£142,500£40,254
£200,000£10,000£190,000£53,672
£250,000£12,500£237,500£67,090
£300,000£15,000£285,000£80,508
£350,000£17,500£332,500£93,927
£400,000£20,000£380,000£107,345

*Based on a bank lending 3.54 times your salary as a First Time Buyer, Source: UK Finance Regulated Mortgage Survey