How 5% Mortgages are Affecting Interest Rates

18 May 2021|Related :

On 3 March 2021 during the Spring Budget, the government announced that they would be introducing a mortgage guarantee scheme. The scheme is designed to help more buyers secure a home by increasing the number of 95% mortgages available, however higher rates and stricter rules could in fact rule out some first-time buyers. In this guide, we’ll be taking a look at what the scheme offers, how it works, who is eligible and how to apply.

What is the Mortgage Guarantee Scheme?

The mortgage guarantee scheme has increased the number of 95% loan-to-value (LTV) mortgages available to first-time buyers, home movers and previous homeowners with a 5% deposit. The government will enable lenders to start offering new 91-95% mortgage deals by guaranteeing they will shoulder some of the cost if the lender loses out on any money e.g. if the borrower fails to keep up with payments and their property is repossessed but the sale of does not match the outstanding mortgage amount.

The government guarantees to cover 95% of any losses a lander has made above 80% loan-to-value. For example, on a £150,000 property with a 95% mortgage, the lender would not have the guarantee on the first £120,000 but the government would then guarantee 95% of the remaining 30,000, which would be £28,500. As part of the guarantee, participating lenders must offer five year fixed mortgages as part of their range of 95% LTV products. 

The scheme opened on Monday 19 April 2021 and will continue to run until December 2022.

Why Has the Government Developed the Mortgage Guarantee Scheme?

The scheme comes after mortgage deals were significantly impacted by the coronavirus crisis and low deposit mortgage deals started to disappear from the market towards the end of 2020. During this time, there were no single standard mortgage deals available to first-time buyers with a 5% deposit and only twenty standard deals were available to those with a 10% deposit, though the majority were fixed long-term deals that kept buyers locked in for up to 11 years.

The government says it is committed to supporting people who aspire to become homeowners, hoping that the scheme will support the new generation in ‘realising the dream of home ownership’, in line with the Prime Minister’s ambitions.

Who is Eligible?

Almost any aspiring buyer with a small deposit can get one of the Government-backed mortgages and, unlike previous schemes, the mortgage guarantee scheme is not limited to first-time buyers. However, there are some criteria you must meet in order to qualify for the mortgage:

  • You must be purchasing a main residential home in the UK which means the mortgages cannot be used for second homes or buy-to-let properties.
  • The property you are purchasing must be worth £600,000 or less. 
  • The property you are buying cannot be a new-build. Lenders aren’t allowing the mortgages to be used on new-build homes as they worry that they will struggle to retain their value- something which would cause issues for the lender should the borrower ever have their home repossessed in the future.
  • You must have a deposit that is equivalent to 5-9% of the property’s purchase price in order to qualify for a 91-95% mortgage.
  • You must apply for a repayment mortgage, meaning you cannot apply for an interest-only mortgage.
  • You’ll need to qualify for a lender’s normal mortgage affordability criteria.

Which Lenders are Taking Part?

Several of the UK’s largest mortgage lenders are taking part in the scheme including Lloyds, Halifax, Bank of Scotland, Natwest, Santander, Barclays and HSBC, who started offering these mortgages on 19 April, however, more lenders are expected to follow such as Virgin Money.

How are Rates Being Affected?

It’s important to note that despite the scheme being Government-backed, it may not be the right option for your individual circumstances. This is because rates tend to be significantly higher for lower deposits, so if you can afford a 10% or higher deposit, you will have much cheaper mortgages available to you.

If you’re between the ages of 19-39 looking to buy your first home, a Lifetime ISA (LISA) could help you to save towards a more sizeable deposit, giving you access to more affordable mortgages. A LISA allows you to save up to £4,000 a year towards your first home or retirement, giving you a cash bonus of up to £1,000 a year on top.

See the table below for examples of how the deposit affects the mortgage:


Cheap Deals 95% LTV

(5% deposit)

90% LTV

(10% deposit)

60% LTV

(40% deposit)

2 Year Fix 3.69% + £594 Fee

On £150,000 Property: Pay £9,054

2.99% + £1,007 Fee

On £150,000, Property:  Pay £8,196

1.13% + £1,001 Fee

On £150,000 Property: Pay £4,621

5 Year Fix 3.45% + £35 Fee

On £150,000 Property: Pay £8,537

3.37% + £1,024 Fee

On £150,000 Property: Pay £8,220

1.28% + £1,025 Fee

On £150,000 Property:

Pay £4,354

2 Year Tracker 3.99% + £35 Fee

On £150,000 Property: Pay £9,034

3.59% + £999 Fee

On £150,000 Property: Pay £9,054

1.39% + £1,016 Fee

On £150,000 property, pay £4772

This table is based on the average 25 year mortgage term. To calculate the annual cost, the fee has been spread into the cost over the length of the deal (2 or 5 years). Rates correct as of May 2021.

How to Apply

Applying for a mortgage with the mortgage guarantee scheme uses the same process as applying for a standard mortgage, with most of these deals being available via a broker or direct from the lender. 

When on the hunt for the best mortgage deal, we would recommend speaking to a mortgage broker about what is best for your individual needs and circumstances. For more information about the scheme, check out the government’s mortgage scheme outline guide.

At Ryans, we offer a range of personal services including financial management and tax planning to help you manage your finances with expert advice on saving for a deposit and mortgages. If you have any questions or want to find out more about our services, please don’t hesitate to get in touch with one of our friendly team members who will be more than happy to have a chat. For the latest updates and advice, take a look at our helpful blog.

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