Budget confirms 95% LVT mortgage guarantee scheme

A new UK Government mortgage scheme will allow first-time buyers and home movers to purchase property up to the value of £600,000 with a 95% mortgage. The scheme aims to hoist first-time buyers with smaller saving pots onto the property ladder.

First, What Is a 95% LTV Mortgage?

A 95% LTV mortgage is a loan-to-value mortgage that requires the purchaser to only put down a 5% deposit. This is much smaller than the average deposit paid by first-time buyers in the UK, currently around 15%. You therefore borrow 95% of the property’s market value at the time of the sale.

Even though these mortgages allow buyers to get on the property ladder with just a 5% deposit, it can still be advantageous to put down a bigger deposit if possible.

What Is the Government’s 95% Mortgage Scheme?

As part of the UK Government’s 2021 budget announcement, it revealed details of an upcoming 95% LVT mortgage scheme. The scheme is seen as a replacement to the Help To Buy Scheme that ceased in 2017 and will guarantee buyers can purchase property with just a 5% deposit, as per the explanation above. The government will be underwriting 95% of mortgages on properties valued up to £600,000.

The government is essentially covering the risks of a property value decreasing (negative equity) and the risk of the borrower not being able to meet their repayments. This encourages banks and building societies to borrow to buyers even with smaller deposits.

Who Can Use the Scheme?

The new scheme will be available for all first-time buyers and people selling their old property to move home. The £600,000 maximum property value will remain the same for both types of buyers.  

This scheme will primarily help first-time buyers get onto the property ladder earlier as they will not need to save as much to put down a deposit.

Which Banks Have Signed Up?

At the time of writing, the UK Government has recruited some high-street lenders to the scheme. Santander, HSBC, NatWest and Barclays have already agreed to participate, and it is anticipated that Virgin Money and others are likely to sign up in the near future.

How Could the 95% Scheme Affect the Market?

The new mortgage guarantee scheme could affect the market in different ways. Suppose the government’s scheme has been introduced to prop up the market artificially. In that case, it could result in property valuations decreasing when the scheme ends and buyers could end up with negative equity.

Another possibility is the scheme provides buyers with increased purchasing power but consequentially drives up property prices. Increased house prices could still prevent some first-time buyers from entering the market.

To help understand the new scheme, or for assistance seeking a 95% mortgage, reach out to our friendly expert team!

March 2021