95% Mortgage Guarantee scheme - is it just a sop for the North?

From today buyers will be able to purchase properties worth up to £600,000 with just a five per cent mortgage, under a government guarantee scheme.

First time buyers and existing homeowners will be able to take advantage and a growing number of mortgage lenders have come forward to take part - most recently Halifax, which over the weekend revealed it would launch its 95 per cent deals today as well.

Zoopla says greater availability of 95 per cent mortgages will have the biggest benefits for buyers in lower value markets in northern England and Scotland.

Richard Donnell, Zoopla’s research and insight director, says: “The scheme will have less impact for buyers in southern England where high house prices are a major barrier to being able to afford a 95 per cent mortgage. This aligns to the levelling up narrative and policy approach of government.” 

According to Donnell’s research, mortgage lending at over 90 per cent remains limited – just four per cent of mortgages were over this level in 2020 Q3, down from almost seven per cent in mid-2019.

Most lending is capped at 4.5 times the borrower’s income. Borrowing at 95 per cent loan to value generates a larger loan size, so in high value markets this may require a larger income than in lower value areas - hence the belief this measure is aimed at helping the North.

While many borrowers can afford to pay the mortgage for the average mortgage rate, they also need to pass a mortgage affordability test. 

For the 95 per cent scheme the affordability test is set at being able to afford a mortgage at three per cent over the standard variable rate which is currently 3.6 per cent. This means a new borrower may need to be able to afford a 6.6 per cent mortgage rate.

Rightmove’s property data director Tim Bannister adds: “The new mortgage scheme could help some first-time buyers bring their plans forward if they have a lower deposit but are still able to pass the affordability checks, and will be welcomed by those who last year we’re struggling to come up with a 15 or 20 per cent deposit.”