Last week saw the announcement of a 95% government-backed mortgage scheme, one of many key declarations from the Chancellor’s 2021 Budget, set to launch in April and run until December 2022.
Despite the stamp duty holiday extension taking centre stage among the declarations in the Budget, the mortgage scheme is of major importance to the property market, offering hope to first-time house buyers and those looking to move. The new low-deposit mortgage guarantee scheme, according to Rishi Sunak, aims to restore the availability of 95% mortgages. The move comes after the government announced plans for a new scheme to boost the number of 95% LTV mortgages back in October, with Prime Minister Boris Johnson stating his intent to ‘turn generation rent into generation buy’.
The mortgage guarantee scheme will allow you to purchase properties valued up to £600,000 with a 5% deposit, but unlike the Help to Buy scheme, it won’t be restricted to first-time buyers or specific property types, with current homeowners able to reap the benefits. The scheme aims to offer incentives that have been wiped out during the pandemic, and to help people get on the property ladder. Given that Rightmove estimates that the eligible properties account for 86% of properties up for sale in the UK, the scheme is set to help many looking to buy.
Sunak has described the scheme as ‘a policy that gives people who can’t afford a big deposit the chance to buy their own home.’ Speaking during the Budget, he went on to confirm that many of the UK’s largest lenders will start offering mortgages within the scheme, including Barclays, HSBC, Santander, NatWest and Lloyds, with further lenders including Virgin Money to follow suit.
The current situation
Most major lenders have been reluctant to offer high loan-to-value (LTV) mortgages due to the Covid-19 pandemic, with many having stopped offering 95% mortgages altogether during the second half of 2020. Currently, most will only offer up to 90% LTV, asking buyers to hand over a 10% deposit. The number of low-deposit mortgage schemes has dropped in recent years, as many banks see them as more susceptible to negative changes in property prices, meaning people hold debt greater than the value of their homes.
Over the last five years, the asking price of a first-time buyer property has increased by £23,000 on average, further adding to the already sizeable obstacles for those looking to buy. The mortgage guarantee scheme aims to reduce the impact the pandemic has on people’s livelihoods, as well as on the British economy. The upcoming scheme is based on the Help to Buy mortgage guarantee scheme that was active between October 2013 and December 2016.
Issues with the scheme
Although there is cause for optimism, the mortgage guarantee scheme may fail to meet the expectations of many hopeful buyers. Despite many big mortgage lenders committing to the scheme, they will not be required to be more lenient with regards to their lending criteria in order to start offering the mortgages. Most mortgage lenders will lend no more than 4.5 times an average salary, meaning that in areas where housing is more expensive, the 95% loan will require a sizeable annual salary. The scheme is also likely to pile even more pressure on the market, leading to an increase in house prices.
What are the experts saying?
According to comparethemarket.com’s director of mortgages, Mark Gordon: “The Government’s confirmation of a ‘Generation Buy’ scheme will help to fill the small deposit mortgage void which is preventing many first-time buyers getting a foot on the ladder. According to our research, almost one-quarter (23%) of first-time buyers have seen their mortgage lender reduce their maximum loan value in the past year. For first-time buyers in particular, this ‘Generation Buy’ scheme is an important boost to help promote choice and competition in the mortgage market.”
Rightmove’s property expert Tim Bannister said: “We’ve heard from so many first-time buyers over the past year of their challenges to raise a 15% or 20% deposit, with a number saying they had to put their plans on hold, so the availability of 5% deposits will really help this all-important market sector. It could help some buyers bring their plans forward, especially if they managed to save more than they were expecting to while in the various lockdowns.”
NAEA Propertymark’s Mark Hayward commented: “A government-backed 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. This new scheme will go some way in giving some hope to first-time buyers at a time when the size of deposits required means they fall at the first hurdle.”
Although the scheme has received the seal of approval from many, a number of property experts remain unconvinced by the upcoming mortgage guarantee scheme.
Islay Robinson, CEO of Enness Global Mortgages said: “Although many big lenders have committed to the government’s announcement today, it will be interesting to see just how many buyers are able to secure such a product when it comes to actually applying. ‘Converting Generation Rent to Generation Buy is a noble initiative but not if it comes at the expense of wider market health.”
Marc von Grundherr, Director of Benham and Reeves commented: “To roll this sort of counterproductive initiative out to the whole of the market wouldn’t be so bad if the government also addressed the issue of supply. If you have trouble climbing the stairs you need to add a handrail, not increase the size of the staircase. However, the government has, yet again, chosen to do just this.”
This article is intended as a guide only. For further information, please refer to the government’s website.