95% mortgage guarantee scheme launches today: does it give first-time buyers a lift?

The government’s new 95% mortgage guarantee scheme launches today, having a host of lenders offering new low-deposit mortgages.

The scheme is set to provide a significant boost to individuals looking to purchase a home having a small deposit, though rates are likely to be significantly higher than before the pandemic.

Here, Which? explains the way the mortgage guarantee scheme works and analyzes the very best deals available so far.

What is the mortgage guarantee scheme?

The new mortgage guarantee scheme is made to encourage lenders to begin offering 95% mortgages, which disappeared almost entirely following the Covid-19 outbreak.

It requires the government dealing with a few of the financial risks faced by banks that provide these deals, like the cost of borrowers defaulting on their payments.

First-time buyers and residential movers are eligible, with mortgages theoretically available on homes priced as much as lb600,000 (lenders may set lower maximum amounts).

The flood of great interest in low-deposit mortgages means some banks might wish to launch 95% deals outside of the scheme (Yorkshire Building Society did this last month).

The key thing for first-time buyers is that the scheme brings more choice, and that greater competition will hopefully bring lower rates.

Mortgage guarantee scheme boosts 95% deals

Some of the UK’s biggest lenders such as Halifax, HSBC and NatWest have launched deals on the first day of the new scheme.

The flood of new deals means that there are now 68 fixed-rate mortgages open to first-time buyers, the greatest number recorded since last April.

As the scheme progresses and much more lenders join, it’s likely this number will rise significantly.

The best rates on 95% mortgages

As we mentioned above, a few of the UK’s biggest lenders have previously launched their new deals, and we’re expecting the likes of Santander and Virgin Money to follow along with suit soon.

When you are looking at rates, however, first-time buyers will have to manage their expectations.

With the scheme in its infancy, lenders are proceeding with caution, with many bunching their deals round the 4% mark.

Two-year fixes

Halifax and Lloyds Bank are providing the least expensive two-year deals, albeit having a lb995 up-front fee. Exactly the same deals with no fee cost 4%.

The good news for cash-strapped first-time buyers is that many lenders are offering fee-free deals. Natwest, RBS and Atom Bank have launched deals at below 4% with no up-front fee.

Five-year fixes

Five-year fixes was once considerably more expensive than two-year deals, but those times are very much over, with rates now only slightly higher.

The three cheapest deals (shown below) all come with fees of lb995-lb999. The cheapest fee-free deals come from Natwest, RBS and Atom Bank, which are offering rates of 4.04%.

What perform the first 95% deals inform us?

Before the beginning of the pandemic, it had been easy to obtain a two or five-year 95% mortgage with a rate of below 3%, which deals reveal that we’re a long way from seeing such low rates again.

The bunching of rates around 4% shows that lenders are very much looking at the marketplace and gauging demand at the moment, similarly to when 90% mortgages were relaunched during the cold months.

As the weeks pass and more banks start to offer 95% deals, we may see rates start to drop.

In the meantime, it appears the battleground is going to be around fees, with Halifax already covering both bases by offering its handles or without up-front charges.

With little to choose between the best rates, we might also see lenders offer cashback incentives to tempt borrowers.

How much can I borrow having a 95% mortgage?

When you are taking out a home loan, lenders will set limits how much you can borrow in relation to your earnings.

The majority of 95% deals launched to date are available at as much as four-and-a-half times your household income.

This means that if you’re buying with a partner and you each earn lb30,000 (lb60,000 as a whole), you should be in a position to borrow as much as lb270,000.

How much you can borrow will be different depending on other circumstances, including your outgoings, debts and any difficulties with your credit score.

Will the brand new scheme make 90% mortgages cheaper?

90% mortgage deals were also decimated through the pandemic, but numbers have been on the rise in recent months.

There are now 267 fixed-rate 90% deals open to borrowers, in contrast to just 88 at the start of December.

Despite the influx, rates only have dropped slightly previously couple of months, with the cheapest two-year fix at 3% and also the cheapest five-year deal priced at 3.3%.

If you are able to stretch to a 10% deposit, it’s worth keeping an eye out in the next few weeks to determine whether the improvement in 95% deals has a knock-on effect by pushing down the price of 90% mortgages.