Updated 17 March 2021
First-time buyers should be able to secure a mortgage with as little as a 5% deposit, with the government underwriting 95% loans, thanks to new measures in the 2021 Budget. The stamp duty holiday has also been extended. Article by Nick Green.
The UK housing market has received a double dose of encouragement to keep it buoyant. Most significantly for first-time buyers, a new government scheme enables mortgage lenders to offer loans up to 95% of the value of a property. The stamp duty holiday has also been extended until the end of June. This good news for homebuyers comes as a number of lenders also begin to relax their lending criteria to cater to those with below-average credit scores or irregular income.
The 95% mortgage scheme was previously hinted at all the way back in October, as Boris Johnson stated he wanted to ‘turn Generation Rent into Generation Buy’. However, at that time the Prime Minister provided few details. It is now confirmed that the scheme will be available from April, enabling homebuyers to purchase properties worth up to £600,000 with just a 5% mortgage. Both first-time buyers and existing homeowners can take advantage of it.
The scheme is similar to the old the Help to Buy mortgage guarantee scheme, which closed to new applicants in 2017 (not to be confused with the Help to Buy equity loan scheme, which is still ongoing and is another way to buy with a 5% deposit).
Under the new scheme, homebuyers taking out a mortgage should not see any practical difference at their end. It is lenders (banks and building societies) that will be incentivised to offer 95% mortgages once again, on the understanding that the government will guarantee outstanding loans if the buyer defaults and there is insufficient equity to pay off the loan and provide a margin for the lender.
The same affordability checks will apply, however – not just anyone with a 5% deposit will be able to take out these mortgages. Homebuyers must prove that they can comfortably afford the monthly repayments after other essential spending has been covered. The Unbiased Mortgage Calculator may be useful here.
A 95% mortgage is one that covers 95% of a property’s sale price, so you will still need to find 5% of this price in the form of cash – i.e. your mortgage deposit. Given that until recently most lenders weren’t offering anything more generous than an 85% mortgage (requiring a 15% deposit), this means that first-time buyers might only have to save up a third of what they would previously have needed. Put like that, it sounds very generous indeed.
However, given the current level of UK property prices, even 5% can be a lot bigger than it sounds. Data from Rightmove, based on average house prices, shows that the UK average 5% deposit would be nearly £16,000 and even in the cheapest region (the North East) it would be nearly £8,000. In the South East this rising to over £20,000 and in London the figure is over £31,000. Saving these amounts, in their respective regions, will be a tall order.
By any measure, the government’s new scheme is a bold move. Once again it involves direct state interference in the property market, by tinkering with the basic principle behind mortgage lending.
Traditionally, a mortgage lender provides a loan on the basis that, if you can’t repay it, they can repossess your home and recoup their money that way (along with making a sufficient profit to stay in business). This model has worked well during periods of rising property prices, since a home’s resale value generally covers the outstanding loan. For this reason, mortgages of 90%, 95% and even 100% (or more) were common during the property boom of the early noughties, since house price inflation of around 10% meant lenders were always protected. All that changed in the crash of 2008, and now very high LTV mortgages are rare or extinct.
Lenders being reluctant to lend high LTV mortgages is a sign of their fear that house prices may crash. Conversely, the government offering to guarantee such loans is a sign that they plan to do everything in their power to keep those prices high. Effectively, they are also ‘betting against’ such a fall in the market. This propping-up of house prices is a mixed blessing for first-time buyers – but for now, probably the best thing buyers can do is take advantage of this chance to buy a home as affordably as possible.
Some industry figures have welcomed the move. Mark Hayward, chief policy adviser at Propertymark, said, ‘A mortgage guarantee scheme will help first time buyers get on the housing ladder at a time when for many owning a home seems an impossible dream. Alongside the potential extension of the stamp duty holiday that we have been calling for, this new scheme will go some way in giving hope to first time buyers at a time when the size of deposits required means they fall at the first hurdle.’
The Chancellor has also extended the stamp duty holiday by three months. Originally set to end on 31 March, it will now run until the end of June – ostensibly to allow property transactions that are already underway to complete without falling through.
The Chancellor has been under pressure to grant the extension, following a petition of over 150,000 signatures and fears that thousands of buyers might pull out of transactions if they find they must pay stamp duty after all. This could result in hundreds of chains collapsing.
The move isn’t without its critics, however. David Westgate, group chief executive of Andrews Property Group, voiced fears of ‘the same cliff-edge scenario in three months’ time’. He said the rush would itself cause bottlenecks in property transactions, causing delays and the risk of overshooting the deadline. He said, ‘A much better solution would be a tapered end to the stamp duty holiday, to allow conveyancers the time to work their way through cases.’
Whether the stamp duty holiday comes to an abrupt end in July, is extended again, or phased out gradually as David Westgate suggests, remains to be seen. Given the government’s determination to keep propping up the housing market, it’s not inconceivable that stamp duty land tax may eventually be abolished altogether.
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