The government’s new 95% mortgage guarantee scheme launches today, with a host of lenders offering new low-deposit mortgages.
The scheme is set to provide a significant boost to people looking to buy a home with a small deposit, though rates are likely to be significantly higher than before the pandemic.
Here, Which? explains how the mortgage guarantee scheme works and takes a look at the best deals available so far.
What is the mortgage guarantee scheme?
The new mortgage guarantee scheme is designed to encourage lenders to start offering 95% mortgages, which disappeared almost entirely after the Covid-19 outbreak.
It involves the government taking on some of the financial risks faced by banks that offer these deals, such as the cost of borrowers defaulting on their payments.
First-time buyers and home movers are eligible, with mortgages theoretically available on homes priced up to £600,000 (lenders may set lower maximum amounts).
The flood of interest in low-deposit mortgages means some banks may decide 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 will bring 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 day one of the new scheme.
The flood of new deals means that there are now 68 fixed-rate mortgages available to first-time buyers, the highest number recorded since last April.
As the scheme progresses and more lenders join, it’s likely this number will rise significantly.
The best rates on 95% mortgages
As we mentioned above, some of the UK’s biggest lenders have already launched their new deals, and we’re expecting the likes of Santander and Virgin Money to follow suit soon.
When it comes to rates, however, first-time buyers will need to manage their expectations.
With the scheme in its infancy, lenders are proceeding with caution, with most bunching their deals around the 4% mark.
Two-year fixes
Halifax and Lloyds Bank are offering the cheapest two-year deals, albeit with a £995 up-front fee. The same deals without a 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 all launched deals at below 4% with no up-front fee.
| Lender | Initial rate | Revert rate | Up-front fee |
| Halifax/Lloyds Bank | 3.73% | 3.59% | £995 |
| Natwest/RBS | 3.9% | 3.59% | None |
| Atom Bank | 3.94% | 3.5% | None |
Five-year fixes
Five-year fixes used to be considerably more expensive than two-year deals, but those days are very much over, with rates now only slightly higher.
The three cheapest deals (shown below) all come with fees of £995-£999. The cheapest fee-free deals are from Natwest, RBS and Atom Bank, all of which are offering rates of 4.04%.
| Lender | Initial rate | Revert rate | Up-front fee |
| Coventry BS | 3.89% | 4.49% | £999 |
| Accord | 3.99% | 4.49% | £995 |
| Leeds BS | 3.99% | 5.29% | £999 |
Source: Moneyfacts, April 2021.
What do the first 95% deals tell us?
Before the start of the pandemic, it was possible to get a two or five-year 95% mortgage with a rate of below 3%, and these deals show that we’re a long way from seeing such low rates again.
The bunching of rates at around 4% shows that lenders are very much sizing up the market and gauging demand at the moment, similarly to when 90% mortgages were relaunched in the winter.
As the weeks pass and more banks begin to offer 95% deals, we may see rates start to drop.
In the meantime, it appears the battleground will be around fees, with Halifax already covering both bases by offering its deals with or without up-front charges.
With little to choose between the best rates, we may also see lenders offer cashback incentives to tempt borrowers.
How much can I borrow with a 95% mortgage?
When you take out a mortgage, lenders will set limits on how much you can borrow in relation to your income.
The majority of 95% deals launched so far are available at up to four-and-a-half times your household income.
This means that if you’re buying with a partner and you each earn £30,000 (£60,000 in total), you should be able to borrow up to £270,000.
How much you can borrow will vary depending on other circumstances, including your outgoings, debts and any issues with your credit report.
Will the new scheme make 90% mortgages cheaper?
90% mortgage deals were also decimated by the pandemic, but numbers have been on the rise in recent months.
There are now 267 fixed-rate 90% deals available to borrowers, compared to just 88 at the start of December.
Despite the influx, rates have only dropped slightly in the last couple of months, with the cheapest two-year fix at 3% and the cheapest five-year deal priced at 3.3%.
If you can stretch to a 10% deposit, it’s worth keeping an eye out in the next few weeks to see whether the surge in 95% deals has a knock-on effect by pushing down the cost of 90% mortgages.
