Government Backed 95% Loan to Value Mortgages

As part of the Government’s Spring budget, Rishi Sunak announced a new 95% loan to value (LTV) ‘Government backed’ mortgage scheme. Residential Mortgage Consultant, Ross MacTaggart, explains the details of the scheme and who can apply.

Who can apply for the Government backed 95% mortgage scheme?
Designed to turn “generation rent into generation buy”, the scheme is primarily aimed at first-time buyers looking to purchase their own home up to a value of £600,000 (some lenders have a lower property value threshold). However, unlike previous ‘help to buy’ schemes, it is also open to home-movers. You cannot use this scheme to purchase a new build, second home or buy to let property, and as a purchase scheme, it does not apply to remortgage or further advance applications.

You will still be required to pass lender affordability and credit checks to secure a mortgage. You can only access this scheme on a capital and interest repayment structure (not interest-only).

How does the Government 95% mortgage guarantee scheme work?
As the borrower, you’ll provide a minimum 5% deposit for the property you wish to purchase. Mortgage lenders consider 95% LTV risky, so to help mitigate this, the Government guarantee the mortgage up to 80% (a maximum of 15%). This means that should you fail to pay the mortgage and the property is repossessed, the Government are partially liable and may have to compensate the lender. Unlike the Help to Buy scheme, the Government do not add to your deposit with an equity loan.

Why have the Government launched the 95% LTV scheme?
At the start of the pandemic, mortgage lenders restricted and tightened criteria and lending appetite. 95% LTV mortgages all but disappeared from the market, and for the most part, 85% LTV was the highest most people could access. Of course, this closed the housing market to most first-time buyers who were suddenly required to produce minimum deposits three times the size previously needed.

With a level of uncertainty still plaguing the pandemic’s financial impact, the scheme is designed to give banks and mortgage lenders more confidence to re-enter the high LTV mortgage market.

While the scheme didn’t officially launch until April, we saw some mortgage lenders return to the 95% LTV space of their own accord in March, indicating longer-term confidence at this end of the market. 

How much can I borrow with the 95% LTV scheme?
Calculations will vary depending on the lender, but it’s safe to assume lenders will use a more conservative income multiple to calculate your maximum loan. I doubt many (if any) will be offering anything higher than 4.5x borrowers’ income, so a safer bet is to use 4x for your initial calculations or give us a call for a more accurate assessment.

Under the scheme, lenders can only offer a fixed rate for a minimum of five years, which gives you the security of knowing your monthly repayments for a longer duration. The interest rates aren’t the most competitive (compared to lower LTV options), starting from just shy of 4%. You’ll need to consider whether the extra interest cost for the first five years is cost-effective in the long run. We can produce comparison mortgage illustrations to help you make this decision if needed, as it’ll depend on your circumstances.

The scheme comes at an excellent time for home-buyers, as the stamp duty holiday extension offers a potential tax saving of £15,000 until 30th June and £12,500 until 30th September 2021. With house prices set to continue rising, now is as good a time as any if you’re considering a house purchase!

If you’d like more information about the Government backed scheme, or mortgages for your home in general, get in touch with me, Ross MacTaggart, today on 01732 471 630 or email me rossm@mortgagesforbusiness.co.uk, and I’ll be more than happy to help.

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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