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It is no secret that first time buyers are struggling to get onto the property ladder especially with the current booming house market and the current average UK house price being around £235,000. The average deposit for first-time buyers is now £57,000 in the UK in 2021 which is £10,000 more than in 2020.
Due to the coronavirus pandemic, most low-deposit mortgages were removed from the market however in order to people afford to buy a house, it was announced in the Spring Budget 2021 that the government will launch a new 95% LTV (loan to value) mortgage guarantee scheme. This means that potential homeowners would be able to secure a mortgage with a 5% deposit for a house under the condition that it is not a new build property. The scheme applies to both first-time buyers and existing home owners and will apply until 31st December 2022.
The scheme launched in April 2021 and is available for properties worth up to £600,000. This is in the hopes to turn “generation rent” into “generation buy”. Major lenders have already signed up to the scheme such as Barclays, HSBC, Natwest, Lloyds Bank and Santander with others potentially joining soon after.
Whilst this may seem like a risk to lenders, lenders will have a government guarantee in the event that the borrower cannot meet their mortgage repayments.
Whilst 95% mortgages seem attractive, does it all seem too good to be true?
As 95% mortgages are riskier to lenders, you can expect there to be drawbacks; one of which is the high interest rates. You can expect to be paying a higher interest rate for the new loans under the scheme than if you would had there would been a bigger deposit. The interest rates for these mortgages are higher than a 90% mortgage however you have to decide if you think you will be able to save up for a larger deposit quicker than property prices will increase. For comparison, the lowest rates currently available for a 95% mortgage is around 3.75% however for a 90% mortgage the lowest rate is around 2.99% for a 2 year fixed product. It is worth noting that interest rates may fall if more lenders join the scheme however this is an uncertainty at the moment.
When a property becomes worth less than the mortgage that has been taken out on it, it then falls into negative equity and the government scheme does not protect against this. Even a slight fall in the value of the property could mean that there is negative equity if there is a 95% mortgage on the property. If you do fall into negative equity, this can cause difficulty in moving home or finding a fixed-rate interest mortgage when the one you are on ends.
The shared ownership scheme gives you the chance to buy a share of your own home and pay rent on the remaining share. As your affordability grows, you do have the option of buyer bigger shares.
To qualify for shared ownership your household earnings must be £80,000 a year or less outside London or £90,000 in London. You must also be a first-time buyer or used to own a home however can longer afford to buy one now or are an existing user of the shared ownership scheme and are looking to move. The deposit needed for a shared ownership property will be 5%-10% of the share price and not the full market value of the property which is a much cheaper option than having to save for a large deposit. You would still need a mortgage however at a much lower amount than non-shared ownership houses and a much less deposit.
If you are a first time buyer, you can apply for the Help to Buy: Equity Loan scheme. This scheme is only available with homebuilders registered for Help to Buy: Equity Loan and only available on new-build properties.
Under this scheme you will need a 5% deposit whilst the government will lend you up to 20% (or 40% in London) and you will need a mortgage of up to 75% for the rest (or up to 55% in London). The home you buy must be a new build and have a purchase price of up to £600,000 in England (or £300,000 in Wales). You must pay back the loan after 25 year or when you sell your home – whichever comes first. This has the main benefit that you will only need a 5% deposit and a 75% mortgage therefore being able to access better mortgage rates.
Given the high interest rates and the risk of falling into negative equity, it is worth aiming to save for a 10% to 15% deposit however if you are not in a position to do so, a 95% mortgage is definitely something worth considering.
The housing market is ever changing and with this uncertainty, it is best to take advantage of the products that are on offer now whether you intend to take out a 95% mortgage, use the shared ownership scheme or apply for an Equity Loan through Help to Buy.
Whatever you decide to do, Glanvilles LLP would be happy to assist you in the purchase of your new home. Get in touch with our Residential Property department in Chichester, Fareham or Havant by giving us a call or filling in our online enquiry form.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.