Part of the Help to Buy package announced by Chancellor George Osborne in the recent budget is a mortgage guarantee scheme. This is intended to help would-be buyers who can only manage to raise a small deposit and have been unable to obtain a high-enough mortgage to buy a home.
This new scheme should benefit people who already own a home but want to move, as well as first-time buyers. It is intended to come into operation from January 2014 and will run for three years.
At present it is difficult for purchasers to obtain mortgages of more than 80% of the value of a property. A few lenders may be willing to advance up to 95% to borrowers who can afford the repayments, but many potential borrowers do not qualify for such high loan-to-value (LTV) mortgages.
This has left many homeowners stuck in unsuitable properties, if the equity in the property they already own is not sufficient to pay a deposit of 20% or more on another home. First-time buyers who do not want to buy new-build homes have also had difficulties raising finance.
The government is now proposing to give guarantees to lenders who are prepared to advance mortgages to borrowers who can find a deposit of at least 5% of the price of the property they want to buy, but not as much as 20%. This should encourage more lending to people who have previously been unable to obtain mortgages, while retaining strict lending criteria.
This scheme will be available to both home movers and first-time buyers, and on properties worth up to £600, 000.
Details of the guarantee arrangements remain to be worked out with mortgage companies, financial regulators and other interested bodies. The Council of Mortgage Lenders, which represents most home lenders, says that it will work constructively with Government to help deliver a workable scheme.
Under the scheme mortgage companies will have the option to purchase a government guarantee on the top slice of the mortgage. In other words, the Government will compensate the lender for a portion of the net losses suffered in the event of repossession. The guarantee will apply down to 80 per cent of the purchase value of the guaranteed property.
Whether the scheme succeeds or not will depend upon how far lenders are willing to accept such guarantees. How much they will cost has yet to be decided, and also whether the cost can be passed on to borrowers.
The government says that the scheme is designed to help creditworthy households struggling to save for the high mortgage deposits required by lenders in the current environment. For this reason, a mortgage eligible for a guarantee under the scheme will need to:
- be a residential mortgage, and not buy-to-let;
- taken out by an individual or individuals rather than an incorporated company;
- be on a property in the UK with purchase value of £600, 000 or less;
- have a loan-to-value of between 80 per cent and 95 per cent;
- be originated between the dates specified by the scheme;
- be a repayment mortgage, and not interest-only; and
- meet certain minimum requirements in terms of the assessment of the borrower’s ability to pay the mortgage, for example a loan-to-income and credit score test.
The mortgage guarantee scheme will also be open to homeowners wanting to remortgage their property. A remortgage with the existing lender will not qualify, but a borrower remortgaging with a new lender would be able to benefit from the scheme.
Fridaysmove will bring you more details of this scheme when the details are announced.