A combination of rising house prices, mortgage lenders withdrawing deals for those with a 10% or less deposit, and savings rates at a historic low, resulted in potential first-time buyers facing a highly challenging market last year. Although the housing market still remains challenging for first-time buyers looking to take their first steps onto the property ladder, there does some to be signs that it is improving.
Here we take a look at what is happening in the first-time buyer market and how would-be homeowners can buy their first home in 2021.
The majority of first-time buyers look to get onto the housing ladder with a deposit of 10% or less. When looking at mortgage rates, this means that they will likely be looking at deals available to those with a 90% loan-to-value (LTV), which would require a 10% deposit, or a 95% LTV, which requires a 5% deposit. Normally, the higher the LTV, the riskier the mortgage lender would consider a loan, which is why lower LTVs often offer lower rates. Due to 90% and 95% LTV mortgages being considered risky to mortgage lenders, when the pandemic began impacting the UK economy many withdrew lending at 90% LTV and above. As a result, this shut many would-be first-time buyers out of the mortgage market. For example, on the 1 March 2020 there were 779 mortgage deals available at a 90% LTV, but just one month later on the 1 April 2020 this had fallen to 326. By July 2020, there were just 70 mortgage deals available at a 90% LTV.
In recent months, however, the number of deals at a 90% LTV has been rising again, for example on the 1 December 2020 there were 88 deals available, but by the 1 January 2021 this had increased to 160. On the 11 January 2021, there were 169 deals available at a 90% LTV. First-time buyers will likely be hoping that the number of deals available at a 90% LTV continues to rise and, although it does seem as though it will continue, at the moment there is too much economic uncertainty to be definite and lenders may start withdrawing deals again. What is clear is that it will take a long period of time for the number of 90% LTV deals to reach the levels they had back in March.
While the number of deals at 90% LTV has increased over the last few months, the number of 95% LTV deals has fallen since November. On the 1 November 2020 there were 12 95% LTV deals available, which fell to just eight on the 1 December 2020 and has remained at eight since. With so few deals available at a 95% LTV, first-time buyers with a 5% deposit may want to continue saving to double their deposit so that they can apply for a 90% LTV mortgage deal instead.
Another reason for first-time buyers with a 10% deposit to start 2021 with optimism is that average rates on two and five year fixed deals at a 90% LTV have been falling. On the 1 December 2020 the average 90% LTV two year fixed rate stood at 3.79%, but this has now fallen by 0.15% to stand at 3.64% on the 11 January 2021. Similarly, the average 90% LTV five year fixed rate stood at 3.92% on the 1 December 2020, but has fallen by 0.14%, to stand at 3.78% on the 11 January 2021.
As highlighted above, mortgage lenders are currently reluctant to lend to those with just a 5% deposit as there are just eight 95% LTV deals currently available. One reason why lenders may be unwilling to lend at a 95% LTV is that there is the possibility that house prices could fall this year, which if they fell by 5% or more, would mean that those who bought their home with a 5% deposit would owe more on their property than it would be worth, which is known as negative equity.
Although there is the risk that the ongoing economic uncertainty, along with the end of the stamp duty reduction on the 31 March 2021, will see house prices fall, there is no certainty that this will happen. The latest Halifax House Price Index revealed that in December 2020 house prices had continued to increase, albeit at a slower rate than in the months previously.
Many first-time buyers may welcome a fall in house prices, but if house prices do fall it could indicate further economic uncertainty and may make mortgage lenders more cautious about approving mortgages to first-time buyers, especially to those without a very high credit score.
First-time buyers struggling to get a mortgage, or who cannot save enough for a 10% or more deposit, may want to consider a guarantor mortgage. Guarantor mortgages require a third party, usually the borrower’s parents or grandparents, to put an asset – for example savings or property – as a guarantee against the mortgage and to make repayments themselves if the borrower fails to do so. Normally, due to the added security of the guarantor’s asset and repayment obligations, those with a guarantor mortgage will be accepted with a very small deposit and, sometimes, none at all.
Although there are risks with guarantor mortgages, including the possibility that if house prices fall the borrower could end up in negative equity as well as the fact that the guarantor may lose their home if repayments are not met, these types of mortgages can be a good way for first-time buyers to get onto the property ladder without having to save for a large deposit.
An alternative way that first-time buyers can get onto the housing ladder without saving for a substantial deposit is by using a Help to Buy scheme.
Help to Buy loans have been around for many years, but at the end of last year the Government launched a new Help to Buy Equity Loan scheme, which restricted the scheme to just first-time buyers and introduced regional price limits on house prices – the new price caps are explained here. The new loan is set to replace the existing scheme on the 1 April 2021, but first-time buyers can apply for the loan now, they just cannot move into their new home until April.
Under the new scheme, first-time buyers can borrow up to 20% (40% in London) of the cost of a newly built home. The buyer then needs to pay a minimum 5% deposit for the home and use a Help to Buy mortgage to fund the remaining cost of the property. The Help to Buy loan is interest-free for the first five years, after which interest is added to the loan starting at 1.75% and rising each April by the Consumer Price Index plus 2%. Borrowers are also charged a monthly management fee of £1 for the term of the loan.
Using a Help to Buy loan can be a good way for first-time buyers to get onto the property ladder with a small deposit, but prospective homeowners need to factor in the additional costs of paying off both the loan (including the interest added after the initial five-year period), as well as mortgage repayments when considering the affordability of this option.
With a number of different options available to first-time buyers, as well as the challenging 90% and 95% LTV mortgage market, first-time buyers should consider speaking to a mortgage broker who will be able to provide advice and support on choosing the best option for their individual situation. As well as this, as the process of applying for a mortgage can be long and complicated, and using a mortgage broker will help to the make the application process a lot more simple and will help to address any problems that may arise from the application.
Those currently saving for a house deposit will have also faced a challenging year during 2020 as saving rates fell to historic lows. This made it a lot harder for savers to boost their savings by earning high interest. As such, savers need to regularly check the savings account charts to ensure that their money is in an account offering them the best rate possible and switching accounts to a higher-paying alternative if necessary.
First-time buyers looking to boost their savings further can consider a Lifetime ISA (LISA). These ISAs benefit for a yearly 25% Government bonus on the amount saved into the account. Savers can deposit up to £4,000 a year into the account, which would result in an extra £1,000 bonus being added to the savings. There are many restrictions with this account, especially when the money saved can be withdrawn, which savers should be fully aware of before opening an account as the penalties for withdrawing money early can not only result in losing the bonus but also some of the savings that were initially deposited. For more information about these accounts, visit our LISA page.
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