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95% LTV mortgages & the new mortgage guarantee scheme: key takeaways for advisers.

95% LTV mortgages & the new mortgage guarantee scheme: key takeaways for advisers.

March 5, 2021
95% LTV Mortgages

Everything we know so far about 95% LTV mortgages and the new scheme.

Accord is the first lender to return to the 95% LTV mortgage market, however, they are not using the new government mortgage guarantee scheme set out by Chancellor Rishi Sunak in the Spring Budget.

Bank of Ireland has followed suit and also returned to the 95% LTV mortgage market this week. But, how will this new mortgage guarantee scheme work and what’s it all about?

In a nutshell, the initiative aims to help people who have just a 5% deposit buy a home or remortgage. Handy for anyone who’s wondering how to buy this year- quite like our most recent client-ready guide.


How does the 95% scheme actually work?

The mortgage guarantee scheme aims to increase the availability of 95% loan to value (LTV) mortgages on the market.

It’ll give lenders, who take part, the option to purchase a government guarantee that will cover up to 20% of any losses they incur if a property on which they have advanced a 95% mortgage is repossessed. Although, lenders will have to take a 5% share of this loss to help ensure they do not write poor-quality loans.

The guarantee will be valid for up to seven years after the mortgage was first taken out. By this time the borrower’s equity stake should have risen to around 20% on a repayment mortgage. The scheme will operate along similar lines to the Help to Buy mortgage guarantee scheme, which ran from October 2013 to June 2017.

Who runs it? It will be administered by National Savings and Investments on behalf of the Treasury, with lenders paying a commercial fee to take part in it.


So, who is eligible to use it?

Well, the scheme is open to both first-time buyers and existing homeowners who want to move home or remortgage but are struggling to do so due to low levels of equity in their property.

Mortgages can only be taken out by individuals, not incorporated companies though. Plus, borrowers must also be deemed to be creditworthy and meet the standard requirements on assessments such as loan-to-income ratios and credit test scores.


Are there any other restrictions on the 95% LTV mortgage scheme?

Unlike the Help to Buy equity loan initiative, the mortgage guarantee scheme is not limited to new-build homes but can be used on both new and existing properties, with the following limitations:

  • The property must be in the UK and have a purchase price of £600,000 or less.
  • It must also be bought with a residential mortgage and cannot be a second home or a buy-to-let property.
  • The mortgage must be a repayment mortgage, not an interest-only one, and have an LTV of between 91% and 95%.

The scheme is designed to ensure lenders cannot use it to restructure the riskiest part of their existing loan book.


When will it be available?

The scheme will be open for applications in April and run until December 2022. The Government will review whether the scheme needs extending towards its planned end date.


Which lenders are taking part?

So far (at the time of writing), several large lenders, including lenders including Lloyds, NatWest, Santander, Barclays and HSBC, have announced they will be part of the scheme, with Virgin Money expected to join them soon.

It’s open to all regulated mortgage lenders in the UK.


How much mortgage choice will borrowers have?

It’s not clear at this stage how many different mortgage products will be offered under the scheme, but the Government has specified that all lenders taking part must offer a five-year fixed-rate mortgage as part of their range.

Remember 5 years is an awfully long time not to keep in touch. And if your clients are taking up 5+ year products keeping that relationship is going to get a lot harder.

So make sure you’ve got the tools in place to keep your clients warm if they opt for this range.


What impact are 95% LTV mortgages expected to have on the mortgage market?

The scheme is expected to lead to a significant increase in the number of 95% LTV mortgages that are available. There are currently only a handful of these products on offer, the majority of which come with conditions after lenders pulled them in the face of the Covid-19 pandemic.

The Government launched the Help to Buy mortgage guarantee scheme in October 2013 in response to a similar shortage of 95% LTV mortgages following the Global Financial Crisis.

The initiative led to the number of 95% LTV products available increasing from 43 in October 2013 to 261 in June 2017. The latest scheme is expected to have a similar impact on the market.


How many borrowers are expected to use it?

While it is difficult to estimate how many people will use the new scheme, particularly as first-time buyers have benefitted from significant government support in recent years, the Help to Buy mortgage guarantee scheme was used by 100,000 people.

As a result, the new initiative is expected to lead to a spike in mortgage applications.

The Government’s liability under the scheme will be capped at £3.9 billion, but this is not expected to act as a constraint on the number of people who can benefit from it.


Where can I find out more about 95% LTV mortgages?

The full policy document on the mortgage guarantee scheme can be viewed here.

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