The 95% mortgages are back, which means that buyers can purchase homes with a 5% deposit. Most specifically, in the recent 2021 budget, it was announced that a new 95% mortgage guarantee scheme will be introduced and this will kick off in April. Today, potential buyers can take advantage of this scheme and buy a new home with such a low deposit of 5%.
The 95% mortgage guarantee scheme kicked off this April 2021 and it will continue to December 2022.
Furthermore, we’ll discuss what the 95% Mortgage Scheme is about, what are the pros and cons, who is eligible, and how to start.
What is the 95% Mortgage Guarantee Scheme?
The 95% Mortgage Guarantee Scheme is the new scheme that was first announced in 2021. With it, the government announced that as of April 2021, it will offer these guarantee incentives as a recovery tool following the COVID-19 pandemic.
Essentially, the scheme will help buyers purchase homes at a low deposit of 5%.
Although it is said that 95% of a mortgage is guaranteed, the scheme guarantees 80% of the mortgage, plus the remaining 15%. This amount is not to be dreaded, as it is held for partial compensation in cases when the buyer fails to pay for the mortgage. That way, by having the guarantee, the mortgage company will feel confident that they will get the payment on time and in full.
Who is eligible to apply for the 95% Mortgage Guarantee Scheme?
If you are a first-time buyer in Australia, you are eligible to apply for this scheme.
The scheme also applies both to those moving into a new home, and those who already own a property. However, the scheme is not viable for investors hoping to purchase the property via a company. Another no-go for this scheme are cases in which buyers purchase properties to let.
Despite the scheme being available to most Australian citizens, there are still additional criteria they need to fulfil to qualify for it.
In terms of eligibility, what’s really interesting is that you can actually buy any property, whether newly built or not. The value of the chosen Australian property should estimate £600,000. This type of mortgage also requires a loan value between 91% and 95%. This essentially means that the minimum a borrower will put down as a deposit is 5% but this number can go as high as 9%.
Which lenders will provide a mortgage loan under this scheme?
The UK government has said that most big banks abroad, such as Barclays, NatWest, HSBC, Santander, and Virgin Money, are about to join the scheme.
To board the 95% mortgage guarantee scheme train, such banks will need to feature a 5-year fixed loan product.
The idea here is for everyone who takes out a mortgage under this scheme to have bigger predictability of their cash flow. With it, they can also estimate the mortgage amount they are paying every month, thus essentially reducing the odds of default.
95% Mortgage Guarantee Scheme vs Help to Buy Scheme:
Although similar from afar, these two schemes differ in various aspects. To put it simply, in the new 95% mortgage guarantee scheme, there are only two-party transactions – the borrower and the lender. With this scheme, borrowers will only have to pay a 5% deposit and have the rest guaranteed by the offer itself.
On the other hand, the Help to Buy Scheme involves three-party transactions. There’s the borrower, the government defining the equity loan, and the bank lending you a certain loan to value. With this scheme, putting a 5% deposit means the government will add another, say, 20% equity, whereas the bank will then put an assumed 75% mortgage.
Though it is a through-and-through plan, with the Help to Buy scheme, borrowers cannot access all 100% of the property equity. Compared to the Help to Buy scheme, the 95% mortgage guarantee scheme gives borrowers access to 100% of the property equity.
Pros and Cons of the 95% Mortgage Guarantee Scheme
The 95% Mortgage Guarantee Scheme comes with various pros and cons that borrowers should consider before making a decision.
- The scheme will help you to put down a smaller deposit (5%);
- It is well suited for those who already have a steady salary;
- It’s available to every eligible Australian citizen;
- It’s not limited to new-build properties;
- You can buy a property for up to £600,000;
- The scheme also helps you own the whole property equity, rather than a portion of it.
- There is more competition during the application process;
- The scheme does not improve the affordability of the mortgage for borrowers;
- It might expose you to negative equity in the future;
- You cannot invest in “buy to let” properties or via a limited company;
- The scheme is only available for a specific period of time, and won’t apply indefinitely
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