Positive News For First-Time Home Buyers

At the Conservative Party Conference last year, Prime Minister Boris Johnson said that it was “disgraceful” that today’s young people struggled far more than previous generations to buy their own home. He stated:

“We need now to take forward one of the key proposals of our manifesto of 2019: giving young, first-time buyers the chance to take out a long-term, fixed-rate mortgage of up to 95% of the value of the home – vastly reducing the size of the deposit.”

Earlier this month, Chancellor Rishi Sunak implemented this promise in his Spring Budget. Alongside extending the Stamp Duty holiday [C1] , government-backed low deposit mortgages are being introduced in April 2021 and will run until December 2022.

How will the 95% government-backed mortgage scheme work?

The Coronavirus pandemic and associated economic consequences resulted in almost all low-deposit mortgages disappearing off the market. This has made it hard for first-time buyers to purchase a home of their own, especially in London and the South East. 

Mr Sunak’s scheme means banks can purchase a guarantee on the portion of a mortgage between 80% and 95%.  If a borrower defaults on their mortgage and their property is repossessed, the government will cover the guaranteed portion of the lender’s losses.

“Credit-worthy” households purchasing homes valued at £600,000 and under will be eligible for the scheme. Second-home and buy-to-let purchases are excluded.

What will the interest rates be on 95% mortgages?

Two mortgage experts made the following predictions to The Guardian[C2] :

“Miles Robinson, the head of mortgages at the online mortgage broker Trussle, says: “At the moment, 90% LTV mortgage rates are 3% to 3.5%, so we could expect 95% LTV mortgage rates to be between 3.5% to 4%. However, there’s the potential that lenders will adjust 90% LTV rates as well as launching 95% LTV deals, so we could see slightly lower deals coming through.”

Nick Morrey, the product technical manager at the broker John Charcol, says: “I would expect the 95% products to range from 3.49% to 3.99%, with some going over, depending on length – for example, five-year fixed rates without a product fee.”

Lenders must offer a five-year fixed rate on all 95% mortgages.

What are the risks associated with a low loan-to-value mortgage?

The biggest risk of having a small deposit when taking out a mortgage is if the property market slumps your home may be worth less than what you have borrowed. This is known as being in negative equity.

If you plan to apply for a 95% mortgage, it is important to consider how long you plan to live in the property you are purchasing. A two-bed apartment in Zone 3 may be perfect if you are single or a couple with no children. But if you plan to start a family in the next five years, falling into negative equity may result in you being unable to sell up and upsize. However, if you plan to live in your new home for the foreseeable future, negative equity is unlikely to affect you as in the long run, property prices always rise.

How can I mitigate the risk of being in negative equity?

The best way to avoid ending up in negative equity is to instruct an experienced Residential Property Solicitor to undertake your conveyancing transaction. They will ensure the necessary checks are done on the title and the right property searches are conducted, especially Water and Drainage, Local Government, and Flooding Searches. This will ensure you do not unwittingly purchase a property that falls in value due to title defects or the local authority announcing they have permission to build a new road through your back garden.

Overpaying your mortgage is another way to hasten the increase in equity you have in your home. Most mortgage lenders will allow you to overpay by a certain percentage. If this is not possible, you can put the overpayment funds in a separate account and pay a lump sum when your fixed-rate term ends.

Final words

The government-backed 95% mortgages scheme will make it easier for many first-time buyers to save for a house deposit. By instructing an experienced Conveyancing Solicitor to advise you on the purchase, you can be confident your best interests will be protected.

Our team can advise and represent buyers and sellers in all aspects of residential property sales and purchases. For a free consultation please call us on 0208 300 6666.

 [C1] Rishi Sunak Likely To Extend Stamp Duty Holiday (klrsolicitors.co.uk)

 [C2] Budget 2021: what do the changes mean for homebuyers? | Property | The Guardian