The government has announced that it will start backing 95% mortgages, allowing home buyers to purchase their home with just a 5% deposit.
Announced on 3 March 2021 in the Spring Budget, the new mortgage guarantee scheme aims to bring back low-deposit mortgages which ‘virtually disappeared’ due to the Covid-19 pandemic.
The scheme should allow more buyers – particularly first time buyers who typically struggle to raise the large amounts needed for a deposit – to get on the property ladder.
For many, this scheme cannot come soon enough. Average house prices in the UK recently exceeded £250,000 (as of December 2020, according to the Land Registry UK House Price Index) and are continuing to rise rapidly thanks to the Stamp Duty holiday.
However, some believe that the scheme will fuel an already bloated housing market, forcing prices up more as increasing numbers of buyers enter the market to take advantage of the new mortgages and the Stamp Duty holiday.
The Stamp Duty holiday has also been extended to 30 June 2021, with a tapered extension to 30 September 2021, potentially saving thousands of property transactions from falling through.
Why did low-deposit mortgages disappear in the first place?
The coronavirus pandemic was initially very unkind to the housing market. As the UK locked down for the first time in March 2020, the housing market closed too, preventing people from viewing properties, progressing transactions, and moving home.
Although the housing market reopened relatively quickly, the wider economy continued to suffer, with many people on furlough leave, made redundant or otherwise experiencing job insecurity. Self-employed people were particularly affected, with many seeing their income plunge to zero with little to no government support available.
Mortgage lenders have also faced their own issues, such as having to adapt their workforce to remote working. This meant that lenders could not process mortgage applications as efficiently.
Amongst the chaos, mortgage lenders have been tightening their belts and took many of their low-deposit mortgages off the market. Only a few select lenders were prepared to offer 90% mortgages (where the buyer is required to provide a 10% deposit). 95% mortgages, which were common prior to Covid-19, were out of the question. First time buyers suffered the most for this because:
- First time buyers tend to be the primary customer for low-deposit mortgages; and
- First time buyers would not typically benefit from the Stamp Duty holiday as they are already exempt from Stamp Duty on purchases up to £300,000.
90% mortgages make a comeback
As we hopefully start approaching the end of lockdown measures in the UK, 90% mortgage products have been making a dramatic comeback.
In September 2020, there were just 44 products on the market for buyers with a 10% deposit. In January 2021, that choice had risen to 197 products.
85% mortgage products have also been significantly increasing, although these held up fairly well during the pandemic (for anyone who could scrape together a 15% deposit).
However, with job insecurity, record low savings rates and rapidly increasing house prices (which have been bolstered by the Stamp Duty holiday), many buyers are still locked out of the market. This is where the new mortgage guarantee scheme comes into play.
95% mortgage guarantee scheme announced in Spring Budget
The new mortgage guarantee scheme will enable home buyers to get a mortgage of up to £600,000 with just a 5% deposit.
The government has says it will guarantee these mortgages, removing some of the risk of lending to low-deposit customers and encouraging lenders to introduce more 95% mortgage products.
Who will be eligible for the scheme?
The new scheme is reminiscent of the old Help to Buy: Mortgage Guarantee Scheme, which helped first time buyers get on the property ladder but which closed to new loans in 2016.
However, there is currently no indication that the new scheme will be limited to first time buyers or new build properties. As it stands, it is expected that any buyer will be able to take advantage of the scheme.
How do you get a 95% mortgage?
The mortgages will become available from April 2021 and last until December 2022. Several of the UK’s largest lenders, including Lloyds Bank, Natwest, Santander, Barclays and HSBC are said to be on board with the plan.
However, it is currently unknown how exactly lenders will respond to the announcement, such as whether they will adjust lending criteria to make the mortgages available to a wider pool of buyers. It is worth speaking to an independent mortgage broker or financial adviser about the availability of mortgages under the new scheme.
Buyers will still be required to pass all affordability checks, such as having a sufficient salary and providing information about expenditure.
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