Yahoo Finance UK 5% deposit mortgage scheme could push house prices up
The introduction of 5% deposit mortgages may prove counterproductive and end up pushing house prices, according to a study.
In last week’s budget, the UK government announced a guarantee to lenders offering mortgages to homebuyers with just a 5% deposit requirement up to the sum of £600,000 ($830,220).
Research by lettings and estate agent, Barrows and Forrester has looked at what this means for first-time buyers (FTBs) across Great Britain, based on the cost of a 5% deposit on the average first-time buyer house price in each region.
James Forrester, managing director of Barrows and Forrester, said: "The great news is, that with a 5% mortgage deposit, the initial financial barrier of securing a mortgage will now be far lower than it previously was.
"However, the latest scheme could have potentially detrimental effects, resulting in house prices climbing further out of reach for homebuyers."
Forrester notes that allowing anyone to secure a 5% deposit mortgage will push up demand, resulting in higher house prices. "It could be a very counterproductive initiative indeed,” he said.
The average first-time buyer house price in the UK currently sits at £210,727 meaning that British FTBs would need to save just £10,536 for a 5% deposit, compared with the usual 15% average of £31,609.
Watch: How much money do I need to buy a house?
Regionally, the North East remains home to the lowest average FTB property cost at just £120,953, meaning a 5% deposit will now require a saving pot of just £6,048 compared to £18,143 previously.
READ MORE: UK house prices decline fall in February but property value remains high
In contrast, London is home to the highest FTB house price at £431,160 and, as a result, the largest cost of a 5% mortgage deposit (£21,558). That said, in the capital the scheme will see the biggest reduction in mortgage deposit costs, down to £43,116 from £64,674.
The most affordable area across the entire UK is Inverclyde in Scotland. With £87,827 paid by FTBs in the area, they will now be able to obtain a mortgage for a deposit as little as £4,391.
Burnley (£4,406) in the North West and County Durham (£4,998) in the North East are both home to the lowest cost for a 5% mortgage in their respective regions.
Blaenau Gwent is home to the lowest initial financial barrier in Wales, with a 5% mortgage deposit costing a mere £5,156. In Yorkshire and The Humber, the City of Kingston upon Hull (£5,320) is the most affordable, while Stoke-on-Trent (£5,620) in West Midlands and Mansfield (£6,530) in the East Midlands also rank as the most affordable within their regions.
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The costs start to increase slightly the closer properties are to London. Although still relatively affordable, Great Yarmouth in the East of England is home to an average FTB house price of £154,614, requiring a 5% mortgage deposit of £7,731.
In the South West, the City of Plymouth (£8,161) is home to the lowest 5% mortgage deposit, while in the South East it’s Southampton (£9,610).
London's Barking and Dagenham ranks as the city’s most affordable area where the cost of a 5% FTB mortgage is concerned. Buyers in the borough will still need to stump up £15,035.
Recent data from Halifax's house price index showed that house prices increased 5.2% in February, compared with the same time period last year. February was the last full month before coronavirus lockdowns and was before the stamp duty holiday was announced by the chancellor.
Watch: How buyers stand to benefit from stamp duty cut?
