Can I access the 95 per cent mortgage scheme as a former homeowner? - Gareth Shaw

Gareth says…

Launched on Monday this week, the new 95% mortgage guarantee scheme is aimed at helping people with small deposits borrow money to buy a property. The 95% mortgage market – which requires buyers to have a minimum 5% deposit – was decimated by the pandemic. These are riskier deals for lenders, with only a small drop in property prices causing users of these deals to end up in negative equity (meaning you owe more than the value of your property). So with so much uncertainty brought by the Covid-19 outbreak, lenders retreated from the market.

So, the government has stepped in to provide a safety net to lenders, taking on some of the financial risk so that they have the confidence to start lending at 95% loan-to-value again. Essentially, the government will compensate lenders for a portion of the losses suffered if they have to repossess a property of someone who has borrowed at 95%, up to 80% of the mortgage value. This means banks and building societies are only on the hook for 15% of losses, making it much more palatable for them to lend.

According to the official government press release, the guarantee will last for seven years after the mortgage is given, which hopefully means we won’t see another drought of deals. However, it stresses that it only sees this as a temporary measure, running between April 2021 and December 2022, after which time it expects economic conditions to be able to support a 95% mortgage market without the need for government intervention.

In response, a flood of lenders have returned to the market. Barclays, Halifax, HSBC, Lloyds Bank, NatWest and Santander have all launched deals this week, with Virgin Money expected to follow soon. Some other lenders have even launched 95% deals outside of the guarantee. Which? research has found that there are now 68 fixed-rate deals available to first time buyers, the highest since April 2020, a figure that’s expected to get higher as more lenders come to the market.

Of course, the deposit is the first hurdle, but you will still need to pass affordability checks. The majority of deals that have come to the market will lend up to four-and-a-half times your income. If you earn £40,000 a year, for example, you’d be able to borrow £180,0000 to buy a £189,000 property. Therefore, the amount of income you earn will play a big factor into whether you’ll be able to get on the property ladder, irrespective of the level of your savings. Your levels of debt, outgoings and credit history will also impact how much you can borrow.

Most deals are currently at the 4% mark – more expensive than the 95% deals that were available before the pandemic, which were priced under 3%. This will also play a role in the affordability assessment a lender makes when deciding whether to offer such a large mortgage.

But let's talk eligibility and the good news is that you can access these deals as a previous homeowner. Much of the focus, quite understandably, has been on first time buyers with small deposits, as this group has been shut out of the mortgage market for more than a year. But the 95% mortgage guarantee scheme can also be accessed by existing homeowners, and I have seen nothing to suggest that doesn’t include previous homeowners.

You may be mixing this up with the stamp duty discount that is available to first-time buyers, which isn’t available to previous homeowners.

However, there are other restrictions. You cannot use the scheme to buy properties worth more than £600,000 and you have to have a minimum 5% deposit. You also have to apply for a repayment mortgage (paying both the interest and capital) rather than an interest-only mortgage.

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Thank you

James Mitchinson