Mortgage Guarantee Scheme Scotland
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Mortgage Guarantee Scheme Scotland
Carolyn Dunion talks about the Mortgage Guarantee Scheme in Scotland. All information is correct at the time of recording the episode, in October 2024.
What is the Mortgage Guarantee Scheme and how does it work in Scotland?
It’s not specific to Scotland, but the Mortgage Guarantee Scheme was brought out over two iterations. The most recent one came on the back of Covid. At that time there was a lot of economic uncertainty, so a lot of mortgage lenders withdrew their 95% mortgage products.
On those products they would lend up to 95% of the property value, meaning that the borrower only needed a 5% deposit. That was particularly popular with First Time Buyers who may not have a lot of cash saved up to get onto the property ladder.
They were very important products, but they are, of course, at the riskier end of mortgage lending – because if somebody takes the mortgage and then fails to pay it, there’s far less equity for the mortgage lender to play with in getting their money back. That’s what they’re really concerned about – if they lend to you and you don’t pay, how will they get the money back?
Confidence had dropped because of economic uncertainty. The government stepped in to give the mortgage lender a bond for 5%. The mortgage borrower contributes 5% cash and then, behind the scenes, a bond is in place for another 5%. That means that if the borrower defaulted on the mortgage, the government would pay the mortgage lender 5%.
This way, the lender’s risk is only 90% instead of 95%, which is much more tolerable to them. The borrower still has a 95% mortgage. If they don’t default on the mortgage, they will probably not even be aware that the scheme is in play. It just sits in the background as an arrangement between the government and the mortgage lender. After a period of time, that bond guarantee falls away and it’s just like any other mortgage.
What are the eligibility criteria for the Mortgage Guarantee Scheme?
You have to meet the individual lender’s criteria for borrowing, full stop. For the government part of the scheme, you must be buying a main residential home in the UK – this can’t be used for second homes or Buy to Let properties.
It must be a repayment mortgage, so you can’t apply for interest only – but to be honest, there’s not much interest only in this area of the market anyway. The property must be worth £600,000 or less, and it can’t be a new build home.
How is affordability calculated for the Mortgage Guarantee Scheme?
This is really up to each individual lender. Most lenders will have a stricter affordability calculation for 95% mortgages in general. It means that if you had a bigger deposit, you might be able to borrow more, which is a little counterintuitive.
That will still apply depending on the individual lender. All affordability calculations are up to the lender and you would just need to comply with whatever that lender dictates.
How much deposit do I need for the Mortgage Guarantee Scheme? Can I get a mortgage with less than a 5% deposit?
No, you must have between 5% and 9% for the Mortgage Guarantee Scheme. In Scotland, remember that if you bid over the valuation for the property, you need that money in addition to the 5% deposit.
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How much can I borrow using the Mortgage Guarantee Scheme?
It’s down to the lender’s affordability calculations. It’s not really very different from just applying for a 95% mortgage.
What repayments options do I have with the Mortgage Guarantee Scheme?
It must be a repayment mortgage. In all honesty, most 95% mortgages have always had to be a repayment product.
What types of properties are eligible for the Mortgage Guarantee Scheme?
As long as it’s your main residence, there are not usually any exclusions other than it not being a new build.
Are interest rates higher using the Mortgage Guarantee Scheme?
Not specifically, but if you were applying for a 95% mortgage, you’re always facing the highest interest rates in the marketplace, because you’re at the riskier end of the scale.
Having said that, we’ve not seen rates being particularly punitive with the Mortgage Guarantee Scheme in place.
Can I transfer my existing mortgage into the Mortgage Guarantee Scheme?
No, but usually you wouldn’t need to. The guarantee scheme was more about giving lenders the confidence to lend new money, where they might otherwise not have done so. It’s really more about new purchases rather than existing mortgages.
What fees will I need to pay with the Mortgage Guarantee Scheme in Scotland?
The nice part of this is that there are no specific costs involved. There will be the usual costs like lenders’ arrangement fees, advisor fees if those apply, valuation fees and so on, but nothing specific to that scheme.
Is the Mortgage Guarantee Scheme available to buyers with a bad credit history?
You have to pass the lender’s credit check and credit profiling to be eligible for the mortgage. That’s largely the same as before the Mortgage Guarantee Scheme was in place.
It’s a bit harder to get a 95% mortgage with bad credit, but if there’s something you’re concerned about, it’s well worth having a conversation with an advisor to see what your options are.
Don’t be put off asking the question if you’ve got something on your credit file that’s of concern. We’ve heard it all before, we don’t judge and we can certainly give you information. You might be able to get something right away that you aren’t expecting – or it might be about setting out a plan for when you can qualify in future.
Is the Mortgage Guarantee Scheme transferable if I move to a new property?
The only scenario where this might come is if you are ‘porting,’ which is when you move the mortgage that you have to another property. Usually you’ll do that to avoid early repayment charges on a fixed rate deal.
The Mortgage Guarantee Scheme is really only relevant if you’ve only got that 5% deposit. If you’ve owned the property for a period of time, I suspect you might be beyond that – you might be below a 90% Loan to Value, as a combination of the property rising in value and you paying off some of the mortgage. So, transferring within the scheme is probably not that relevant.
How long is the Mortgage Guarantee Scheme available for?
A lot more lenders now aren’t using the Mortgage Guarantee Scheme. It’s phasing out, I would suggest. I don’t know how long it will be in place for.
At the point of having this conversation, in October 2024, a budget from the new government is due at the end of the month. It will be interesting to see if this is mentioned.
But in a lot of ways, it’s done its job. It’s given mortgage lenders the confidence to continue to lend at 95%. The economic turmoil of Covid, whilst long reaching, is not unsettling mortgage lenders too much now. They’re on more of an even keel.
I would like to think that when the Mortgage Guarantee Scheme does stop, most people won’t be aware of it. They’ll still be able to apply for 95% mortgages – it just won’t be there in the background.
How do I apply for the Mortgage Guarantee Scheme in Scotland?
You don’t have to do a single thing. The agreement is between the lender and the government. There could be people listening to this who are part of the Mortgage Guarantee Scheme and have no idea. There’s no extra paperwork for us as advisors or as applicants. It just sits in the background.
What else do we need to know about the Mortgage Guarantee Scheme?
As I always say at the end of these podcasts, there’s no substitute for good advice. These types of mortgages and the criteria change all the time. It’s always worth having a conversation to find out what’s the right solution for your circumstances.
At McKendry Dunion Financial, we’re always very pleased to speak to people, even if you’re on the early part of your journey. It might be that we speak to you today and you’re not in a position to actually go out and buy for another year. That’s absolutely fine – we’re here whenever you need us.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR PROPERTY.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
Useful Links
- First Time Buyers
- Agreement in Principle
- Declined Agreement in Principle
- First Time Buyer Joint Mortgages
- First Time Buyer New Build Mortgage
- Self Employed Mortgage First Time Buyer
- 5 Percent Deposit Mortgage Scotland
- Shared Ownership Mortgage Scotland
- Joint Borrower Sole Proprietor
- Guarantor Mortgage Scotland
- Gifted Deposit Mortgage
- Offers Over Home Report
- Mortgage Guarantee Scheme Scotland
