95% first-time buyer mortgages
Are There Any 95% Mortgages Available For First-time Buyers?
First-time buyers will be able to secure mortgages with as little as a 5% deposit, with the government underwriting 95% loans, thanks to measures in the 2021 Budget.
The stamp duty holiday has also been extended following the impact of the coronavirus pandemic.
The UK housing market has been encouraged to maintain buoyancy. Significantly for first-time buyers, the new government scheme allows mortgage lenders to offer loans up to 95% of the property’s value. As well as this, the stamp duty holiday has been extended until the end of June.
95% mortgages are nothing new, and this scheme was previously mentioned in October 2020, as Boris Johnson said he wanted to ‘turn Generation Rent into Generation Buy‘. That said, the Prime Minister provided few details at the time of making the statement. However, it has now been confirmed that the scheme will be available from April 2021, empowering ‘generation buy’ to purchase properties worth up to £600,000 with just a 5% mortgage.
Both first-time buyers and existing homeowners can benefit from this.
How Does The 95 Percent Mortgages Scheme Work?
The scheme is similar to the old Help to Buy mortgage guarantee scheme, this scheme closed to new applicants back in 2017 (not to be confused with the Help to Buy equity loan scheme, which is still available and is an alternative way to buy with just a 5% deposit).
Under the proposed scheme, homebuyers taking out a loan with mortgage providers will not see any practical difference at their end. It is the loan lenders (banks and building societies) that will be encouraged to offer 95% mortgages once again, the understanding is that the government will then guarantee outstanding loans if the house buyer defaults and there is insufficient equity to pay off the loan and provide a margin for the lender.
However, the same affordability checks will apply. There will be criteria to meet, the 5% deposit will be able to take out these mortgage products. Homebuyers looking to get a (Loan to value ltv) 95% mortgage must prove that they have the financial means to afford the repayments after other essential monthly spending has been covered. The Unbiased Mortgage Calculator may be useful here.
How Much Deposit Will I Need With The 95% Government Mortgage Guarantee Scheme?
A 95% loan to value mortgage covers 95% of a property’s sale price, so you will need to find the other 5% of this price in the form of your mortgage deposit. Over the last few years, most lenders weren’t offering anything more substantial than an 85% mortgage, thus necessitating a 15% deposit; this means that first-time buyers are only required to contribute a third of what they would previously have needed.
This is still quite a chunk of money. Based on average house prices, in the UK, the average 5% deposit would be close to £16,000, and even in the cheapest region (the North East), it would be approaching £8,000. In the South East, this rises to well over £20,000 and in London, the figure is an eye-popping £31,000. Saving these amounts in their regions will still be challenging for some. That’s without a product fee any charge for any other related service.
Choosing The Right 95% Mortgage
When choosing a 95% ltv mortgage, you’ll need to decide whether you want to take out a fixed-rate or variable-rate loan. Securing mortgage advice on the best mortgage products and mortgage deals is in your best interest.
Fixed-rate mortgage payments
A fixed-rate mortgage will usually last between two and five years, depending on the lender. This means you won’t have to worry about interest rates rising and your monthly payments going up during that period. However, if you want to get out of the deal before the fixed term ends, in most cases will have to pay an early repayment charge – known as an ERC.
At the end of the mortgage term, you should look for another competitive deal. If you do nothing, you will be transferred onto your lender’s standard variable rate, which is likely to be more expensive.
Variable-rate mortgage payments
Lenders offer standard variable-rate (SVR) mortgages, which are usually their most expensive. In addition to cheaper fixed-rate deals (see above), you can consider a tracker mortgage, where the interest rate you pay is linked to an external benchmark, usually the Bank of England base rate.
As the base rate moves, so too does the tracker rate. The rate might be set at “base rate plus 1%”, for example, meaning it will always be 1% more than whatever the base rate is at the time.
Is The 95% LTV Mortgage Guarantee Proposal Good For The Property Market?
The government’s new scheme is a brave move. However, they recognise that getting a foot on the property ladder can be tough. Again it involves direct state interference in the property market by tweaking the basic principle behind mortgage lending.
Generally, a mortgage lender issues a loan on the basis that, if you can’t repay it, they can repossess your home and recover their money by selling your property that way as well as making enough profit to stay in business.
This works well during periods of increasing property prices since a home’s resale value covers the outstanding loan (in general). Due to this, mortgages of 90%, 95% loan to value of the purchase price, and even 100% were widespread during the early noughties’ property boom, since house price inflation of around 10% meant lenders were always safeguarded. All that altered in the crash of 2008, and now very high LTV mortgages are unavailable.
Banks are hesitant to lend high loan to value mortgages due to the fear that house prices may crash and leave them significantly short. On the other hand, the government offering to guarantee these loans shows that they plan to do everything in their power to maintain high prices.
In some ways, they are ‘betting against’ such a fall in the market. This is a mixed proposition for first-time buyers; however, the best thing a customer can do, in my view, takes advantage of this chance to buy a home as affordable as possible.
Remember you must keep up the repayments on your mortgage or your home may be repossessed.
Could The Government Mortgage Guarantee Scheme Affect House Prices?
The Government guarantee on high loan to value mortgages is not always a good sign for the housing market. If lenders are nervous about lending to borrowers with a small deposit, they are concerned house purchase price levels could fall.
Although the scheme could be a helping hand on the property ladder for many prospective borrowers, if the government is artificially ‘propping’ up the market, a risk house prices could drop once government ltv mortgages schemes are withdrawn from the market. If the purchaser only has a 5% deposit or equity in their home, they are at risk of negative equity should property prices fall.
On the other hand, schemes such as this can cause property prices to rise. If more borrowers have greater purchasing power due to the government guarantee – and can buy with a 5% deposit, this could heat the market and force prices up. This could mean many prospective first-time buyers will remain shut out of the property market.
Stamp Duty Holiday Will Be Extended Until The End Of June.
In the budget, The Chancellor has announced the stamp duty holiday will be extended by three months. Originally the deal was set to end on 31 March 2021, the period will now run until the end of June. Apparently, to allow property transactions that are already underway to complete without falling through.
We will need to wait and see whether the stamp duty holiday period comes to an abrupt end in July, is extended again, or phased out.