Starting today, a new government-backed mortgage guarantee scheme will see more low-deposit options offered to aspiring homeowners.
Chancellor Rishi Sunak confirmed in his Budget last month that the 95 per cent mortgage scheme was designed to be a “policy that gives people who can’t afford a big deposit the chance to buy their own home.”
From deposit requirements as low as five per cent of the purchase price, to the risks of negative equity, here’s what you need to know about the new measures aimed at giving (some) first-time buyers a helping hand.
Why has Rishi Sunak put 95 per cent mortgages in the Budget 2021?
Low-deposit mortgages have been wiped out in the last year as a result of the coronavirus crisis’s impact on the UK economy. Most lenders were only offering a maximum 90 per cent loan-to-value mortgage, asking buyers to pay a 10 per cent deposit.
This makes it more difficult for first-time buyers to get on the property ladder, as they can struggle to save up a large enough deposit, especially in expensive areas such as London.
“For those with little in the way of deposit, finding a 95 per cent LTV mortgage has been pretty much impossible in recent months,” said Mark Harris, chief executive of mortgage broker SPF Private Clients, ahead of Sunak’s announcement in March.
“The odd building society here and there has offered them, with Saffron building society launching at 95 per cent in June but it only lasted a matter of days. Furness BS also has a selection of 95 per cent products but these are restricted to certain postcodes.”
Low-deposit mortgages also became a rarity in the years following the 2008 financial crash, prompting the introduction of the Help To Buy scheme under David Cameron’s government. Higher loan-to-value mortgages have started to reappear in recent years, but the backlog of mortgage applications caused by the Covid-19 crisis prompted lenders to take them off the market.
“A government backed mortgage guarantee scheme will help first time buyers get on the housing ladder at a time when for many owning a home seems an impossible dream,” said Mark Hayward, chief policy adviser at Propertymark, prior to the Budget.
“This new scheme will go some way in giving some hope to first time buyers at a time when the size of deposits required means they fall at the first hurdle.”
The new scheme piqued buyers’ interest immediately, with Rightmove revealing that the use of their mortgage calculator jumped by 85 per cent within half an hour of Sunak’s announcement, and overall traffic to its website jumped by 16 per cent.
Are the 95 per cent mortgages for first-time buyers only?
Boris Johnson has said that he wants “generation rent to become generation buy”, but the new mortgages are not solely available for first-time buyers.
The 95 per cent mortgages will be available to all buyers of properties costing up to £600,000. According to a study by Rightmove, this accounts for 86 per cent of all homes currently up for sale in the UK.
All buyers will also be able to fix their initial mortgage rate for at least five years.
Unlike the Help To Buy scheme, the scheme will not be linked exclusively to first-time buyers, or restricted to new build properties only.
The mortgage guarantee does, however, seem to be aimed at helping first-time buyers. According to Rightmove’s figures, the national average asking price of a first-time buyer property is £200,692, which would mean a deposit of around £10,000.
The average London first-time buyer spends £489,098 according to Halifax, which would mean a minimum deposit of just under £25,000.
How do you get a 95 per cent mortgage?
The mortgages are available until 31 December 2022. It is not thought that banks will be helped to adjust their affordability checks to make the scheme available to a greater number of buyers.
As it stands, mortgage lenders tend to only offer loans of up to 4.5 times the buyer’s salary. This means, for the average first time buyer in London purchasing a property at £489,098, a 95 per cent loan-to-value mortgage would only be available to buyers with an annual salary of at least £103,254 (this can be split across more than one salary, for example, if a couple were buying together).
This means that, under the current affordability checks, it will still be difficult for middle-income buyers to afford a home in the capital.
“There is more to be done to improve how we assess affordability,” said Ian Larkin, CEO of online mortgage broker Trussle. “We encourage the Government to review the rules introduced by the Financial Policy Committee in 2014 and consider updating the affordability test, to ensure that new mortgage borrowers can afford their mortgage if interest rates went up by two per cent within the first five years of the loan, rather than the three per cent is set at today.”
How does this work for 95 per cent mortgage lenders?
Lenders stopped offering 95 per cent mortgages as the economic forecast deteriorated over 2020, due to the fact that they are higher risk products.
“First time buyers have been missing out as banks chose to focus on perceived higher quality loans. For a healthy property market, the first rung of the ladder needs to be working and this will ensure that,” said Dominic Agace, chief executive of Winkworth, prior to the Budget announcement.
These new mortgages will be guaranteed by the government, removing the risk from the loans for lenders.
Which lenders will be offering the 95 per cent mortgages?
In his budget speech, the Chancellor said that “several of the country’s largest lenders including Lloyds, Natwest, Santander, Barclays and HSBC will be offering these 95 per cent mortgages.”
He also said that “more, including Virgin Money will follow shortly after.”
These big names may have already committed themselves, but some agents are sceptical about how widespread the uptake will be among lenders.
“Banks have demonstrated a reluctance to lend in this market during the past twelve months, partly due to the sheer volume of business at lower LTVs and partly due to concerns over the outlook for jobs,” said Oliver Knight, head of residential development research at Knight Frank.
“Though that outlook is improving, the success of the scheme will depend on how many lenders take it up, on top of those announced so far, and what pricing they adopt. The government will be hoping the guarantee will significantly stimulate appetite to lend in that space.”
Islay Robinson, CEO of Enness Global Mortgages, added: “It will be interesting to see just how many buyers are able to secure such a product when it comes to actually applying.”
What are the risks for buyers?
With the UK housing market prospects uncertain for the coming years, there is concern that low-deposit mortgage buyers could be at risk of falling into negative equity.
If house prices were to fall, recent buyers with a 95 per cent LTV mortgage would be more likely to owe more money than their house is worth. Buyers who have paid a larger deposit could avoid that issue by having less to repay.
Negative equity makes it difficult (or impossible) to sell or remortgage a home, proving a risk to new buyers hoping to climb the property ladder.
What effect could the 95 per cent mortgages have on the housing market?
Some industry commentators have speculated that the new mortgages could inflate house prices. This was the criticism lobbied at the Help To Buy guarantee scheme, which housing charity Shelter says raised house prices by 1.4 per cent.
In his Budget response speech, Labour leader Keir Starmer said the Chancellor had “lifted a failed policy from 8 years ago”, presumably referencing the original Help To Buy scheme.
“And what did that do?” said Starmer. “It fuelled a housing bubble, it pushed up prices and made owning a home for difficult.”
Some experts, however, have been more optimistic.
“In my view, this is a better way than Help To Buy,” said Agace, in advance of Sunak’s Budget. “It will avoid the bubbles created around the new build properties that qualified for Help To Buy by spreading it across the whole market.”
“With an effective plan to deliver more homes in the medium to longer term, [the new mortgage guarantee scheme] need not mean significant price rises.”
“Critics may argue that it will only aid house price inflation, but without such a scheme would developers be so keen to put spades in the ground?” added Mark Harris, chief executive of mortgage broker SPF Private Clients, also ahead of the Budget speech. “The supply of new housing is nowhere near where it needs to be to satisfy demand.”
Agace also suggested that the scheme will help stimulate the lower end of the market. "This is a positive solution to the current conundrum in the property market where properties under £600,000 have been increasingly difficult to sell, due to lower mortgage availability,” he says.
“Meanwhile, second time buyers with plentiful cheaper mortgage products have been in a boom of activity.”