Budget 2021 – How new mortgage loan guarantee scheme for first-time buyers will work

FIRST-TIME buyers with small deposits are set to get extra help in the Budget with a new mortgage guarantee scheme.

But when is it launching and how will it work? We explain all we know so far.

What is the mortgage guarantee scheme?

The mortgage guarantee scheme will help first-time buyers get a home loan with a 5% deposit.

Most banks stopped offering the 5% deposit mortgages early last year because of the coronavirus crisis.

They are often seen as riskier by banks as they are vulnerable to falling house prices, and there were just eight on the market in January, 2021, according to the Treasury.

Some lenders such as NatWest and Lloyds have since brought back 10% deposit mortgages, but there are strict rules and limited availability.

To help get young Brits on the property ladder with a 5% deposit, the government will guarantee part of loans under the scheme to encourage banks to offer them.

Chancellor Rishi Sunak is set to announce the scheme in the Budget next Wednesday, on March 3.

It's an aim by Prime Minister Boris Johnson and Mr Sunak to turn “generation rent” into “generation buy”.

Mr Johnson first mentioned the 5% deposit mortgage scheme at the virtual Conservative party conference last year.

Has the government offered similar help before?

Previous help from the government includes the Help To Buy equity loan scheme, which also saw first-time buyers benefit from 5% deposits.

Through the initiative, home buyers could borrow up to 20% of the value of a property from the government, or up to 40% in London.

The loan was interest-free for five years, and if the borrower missed a payment on the loan, the government would pick up some of the loss.

By the time Help To Buy was pulled in December 2016, the number of 95% mortgages available on the market had more than doubled.

The new mortgage scheme will be based on its previous version, which the Treasury said helped over 100,000 households get on the property ladder.

How will the new scheme work?

The new scheme is actually not restricted to first-time buyers or new-build homes, but it'll only be available on properties worth up to £600,000.

Around 86% of properties up for sale currently have an asking price of £600,000 or less, according to property website Rightmove.

Under the scheme, the government will offer lenders the option to buy the guarantee they need to provide mortgages that cover the other 95%.

The guarantee will compensate them for a portion of their losses if you default on your loan, but the Treasury has not yet confirmed how much it'll cost.

Before you get the loan, you'll still be subject to the usual affordability checks.

All lenders under the scheme will also offer mortgages fixed for at least five years as part of their range of products.

This will give first-time buyers a sense of security by knowing your mortgage rate won't go up over the short term.

The Treasury said the mortgage guarantee scheme will be available from April.

What do the experts say?

The scheme, which was first revealed yesterday evening, has already divided opinion among property experts.

Mark Harris, chief executive of mortgage broker SPF Private Clients, told The Sun the scheme "doesn't come as a complete surprise".

He added: "It is positive news for first-time buyers, particularly as it is not restricted to new homes.

"For those with little in the way of deposit, finding a 95% loan-to-value mortgage has been pretty much impossible in recent months.

"The odd building society here and there has offered them, with Saffron Building Society launching at 95% in June but it only lasted a matter of days.

"The only other current option to obtain a mortgage at this level is to call upon a third party, typically a parent, to provide extra security in the way of deposits or equity within the ‘guarantor’ property.

"Not everyone is in a fortunate position to do so."

However, property expert Henry Pryor said the scheme is "a terrible idea".

He added: "It is unnecessary and will push prices up even further out of the reach of the very people the government claims that it is designed to help".

What other schemes are available?

Getting on the property ladder can feel like a daunting task but there are other schemes out there to help first-time buyers have their own home.

Help to Buy Isa

A Help to Buy Isa a tax-free savings account where for every £200 you save, the government will add an extra £50.

But there's a maximum limit of £3,000 which is paid to your solicitor when you move.

These accounts have now closed to new applicants but those who already hold one have until November 2029 to use it.

Help to Buy equity loan

Under the Help to buy equity loan scheme, the government will lend you up to 20% of the home's value – or 40% in London – after you've put down a 5% deposit.

The loan is on top of a normal mortgage but it can only be used to buy a new build property.

The scheme will be replaced with another one with the same name on April 1, 2021 – and it's already opened for applications.

Under the old scheme, the property value had to be worth less than £600,000 to be able to qualify for a loan.

But loans under the new scheme will be capped at 1.5 times the average first-time buyer property price by region in England.

This is to stop already wealthy first-time buyers using the scheme to purchase bigger homes.

Lifetime Isa 

A Lifetime Isa is another government scheme that gives anyone aged 18 to 39 the chance to save tax-free and get a bonus of up to £32,000 towards their first home.

You can save up to £4,000 a year and the government will add 25% on top.

Shared ownership

Co-owning with a housing association means you can buy a part of the property and pay rent on the remaining amount.

You can currently buy anything from 25% to 75% of the property but you're restricted to specific ones.

Meanwhile, the government plans to allow home buyers to get on the ladder by purchasing just 10% of the property in future.

First Homes pilot

Boris Johnson last year revealed a new affordable housing plan, which is set to include a 1,500 unit pilot of "First Homes".

These will be no different from other properties except they will be sold to first-time buyers with a discount of 30%.

They will be sold to local people who want to stay in the community where they live or work but are struggling to buy a home at market prices.

The government is still consulting on the final design of the First Homes scheme though, so it's yet to release more details.

Are you a first-time buyer keen to get on the property ladder? Check out our guide.

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