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Help to Buy Mortgages
Help to Buy (equity loan) Guarantee Scheme
This part of the government’s Help to Buy scheme is completely different from the loan scheme. It aims to encourage mortgage lenders to offer more 95% mortgages to people by making it less risky for them to do so. This part of the scheme does not involve any active participation on the part of the borrower who should simply benefit from access to a larger number of 95% mortgage deals.
Mortgage market background
In the past there were hundreds of mortgages available at 90%, 95% and even 100% ‘loan-to value’ (LTV), so if you had a 10%, 5% or even no deposit, there was plenty of choice available. To protect themselves against the risk of borrowers with these smaller deposits ‘defaulting’, i.e. not making their mortgage payments, lenders traditionally took out insurance called mortgage indemnity cover.
However, in the years leading up to the credit crunch, with most lenders offering higher LTV mortgages, such deals had increasingly become the norm and were considered a reasonable risk for lenders and so mortgage indemnity had started to be phased out of the market.
The government has now proposed that it plays the role of the insurer and as of 10th October 2013 plans to provide indemnity to lenders offering higher LTV loans, promising to compensate them for part of their losses if mortgage borrowers fail to make their mortgage repayments. This may allow lenders to offer higher rate LTV deals at lower mortgage rates. Note that the indemnity only compensates the mortgage lender if you default on your loan, and offers no help to the borrower. If you default on your mortgage you still owe the full outstanding balance.
Why is the mortgage indemnity important?
Mortgage indemnity could make a big difference if it allows borrowers access to more deals with smaller deposits. In recent years while a handful of lenders have continued to offer mortgages above 80% LTV, and even up to 90% LTV because such loans are deemed more risky by underwriters, these higher LTV mortgages have been charged at higher interest rates than home loans under 75% LTV. A typical interest rate charged on a 95% mortgage is around 2.99% while the typical interest rate charged on a 75% mortgage is around 1.5%*.
Increased competition among mortgage lenders in the higher LTV area may act to bring down the interest rates charged on these loans.
HB *Rates correct as of 16/06/2016
Fee Free Help to Buy mortgage advice
If you would like to find out more about Help to buy mortgages or discuss your mortgage options please complete our enquiry form mortgage advice.
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Think carefully before securing other debts against your home, your home may be repossessed if you do not keep up repayments on your mortgage.
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