In last week’s budget, the Chancellor announced a new mortgage guarantee scheme that is designed to help those struggling to save for a house deposit to buy a home with just a 5% deposit. The idea behind this scheme is to increase the number of mortgage deals available to those with a 5% deposit, which require a 95% loan-to-value (LTV) deal.
When the pandemic began impacting the UK economy last March, lenders withdrew many of their mortgage deals from the market and although during the year the deals have begun to be reintroduced, many at 95% LTV have not returned. In fact, our research found that in March 2020, there were 391 95% LTV deals available, whereas today there are just five.
A reason why lenders have been reluctant to reintroduce 95% LTV deals to mortgage borrowers is that these mortgages are considered risker than those available to borrowers with a larger deposit. As such, the Government’s mortgage guarantee scheme is designed to help encourage lenders to reintroduce these deals into the market by removing some of the risk to lenders, but the scheme does not remove the risk to borrowers. Here, we’ve looked at the risks of buying a property with a 5% deposit and the alternatives available to those struggling to get onto the property ladder.
A borrower will unlikely see much difference when getting a mortgage through the Government’s mortgage guarantee scheme and a standard mortgage, however they may see that rates on deals through the scheme are slightly higher. In addition to rates, the main difference is that there will be more 95% LTV deals available, which should make it easier for those with a 5% deposit to get a mortgage.
Back in 2013 the Government launched a similar scheme, again designed to increase the number of 95% LTV deals available to mortgage borrowers with a 5% deposit. In a report published in September 2017, looking at data from October 2013 to June 2017, it found that this scheme resulted in 104,763 mortgages completed and of these, 80% were first-time buyers. As such, it shows that the previous scheme had some success in helping first-time buyers who were only able to save for a small deposit to purchase their first home.
Although buying a property with a 5% deposit can be a good way for those finding it difficult to save for a larger deposit to get onto the property ladder, a 95% LTV mortgage can be riskier than deals at a lower LTV.
One of the biggest risks is that the borrower will fall into negative equity if house prices fall significantly. When the previous mortgage guarantee scheme was launched in 2013, house prices continued to rise so that those with a 95% LTV were able to increase the equity they owned in their home. At the moment, however, there is uncertainty regarding the housing market and a possibility that house prices rises could slow or, perhaps, start to fall. If house prices do start to fall, those with a 95% LTV mortgage could find themselves in negative equity, in which they owe more on their home than it is worth.
Saying this, under the scheme, lenders will be offering mortgage deals for up to a five year fixed rate term. This means that borrowers on this term will not have to think about remortgaging until after the five-year term has ended, in which case even if house prices fall slightly, they should still have enough equity in their home to remortgage.
For those able to save for a bit longer and put down a larger deposit, it might be worth the wait as they are likely to get a lower mortgage rate than buying a property on a 95% LTV deal. Already rates on 95% deals are higher than those offered at 85% LTV or even 90% LTV, which would require deposits of 15% and 10% respectively. As well as this, the cost to lenders offering 95% LTV deals under the guarantee mortgage scheme will be higher with having to pay extra administration costs and a Government fee, and as such it is likely lenders will pass these costs onto borrowers, which will in turn increase rates further.
This means that those considering a 95% LTV should consider the affordability of the mortgage and, although many may find that the monthly 95% LTV mortgage repayments are still lower than their monthly rent, they should factor in the possibility of rates rising when they look to remortgage, which could add significant amounts to their monthly repayments. Again, locking into a five year fixed rate deal will ensure that monthly repayments remain the same for the length of the term.
To ensure that they get the best mortgage deal available, first-time buyers struggling to save for a deposit should consider all the options available to them. For example, those who are able to save for longer may benefit from the Government’s 25% bonus when saving for a house deposit with a Lifetime ISA. Alternatively, those unable to save more could consider a Help to Buy loan as a way of getting onto the housing ladder.
Those who are not eligible for alternative options, such as those who have or currently already own a property, as well as those wanting further help in looking at potential options, should consider speaking to a mortgage broker who will be able to provide advice tailored to their specific needs.
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