IIt was billed to give potential homeowners access to the housing market. When Chancellor Rishi Sunak announced a mortgage guarantee system to encourage banks and building societies to lend to people who can only afford a 5% deposit, he announced this as a way of “Generation rent after generation buy”.
The move taken last week has resulted in numerous new mortgage products being launched both inside and outside the system. However, buyers have been warned that they may pay a higher interest rate on the new loans than if they had a larger down payment.
And then there is concern that the guarantee could cause house prices to spike, leaving future generations to borrow even more. Or they could fall and throw people into negative equity.
Others have welcomed the new system. “Introducing various 95% options for borrowers is extremely positive and will help many people who otherwise would not have made it to the residential ladder,” said Mark Harris, general manager of mortgage broker SPF Private Clients.
A new market
When the pandemic broke out, fearing the economic impact of Covid-19, mortgage providers mostly closed deals that required buyers to deposit as little as 5% deposit. In March of last year, 378 mortgage products were available, according to the financial information website Moneyfacts, but they have largely disappeared.
Last month, Sunak announced the rule that the government would guarantee the 95% loan. Under this system, the government guarantees a portion of the mortgage if the borrower defaults.
The news alone was enough to encourage some lenders to return to the market – in March Yorkshire Building Society began offering a 95% no-government guarantee deal. Last week, lenders using the guarantee began introducing products, most of which have a fixed term of two years.
Figures from Moneyfacts show the best value for money as a Halifax two year Fixed Rate Mortgage at 3.73% and a processing fee of £ 999.
Outside the system, Barclays Springboard Fixed Rate Mortgage offers a five year term of 3.45% interest, although a sponsor is required.
The best five-year, no-guarantor fix is 3.89% from Coventry Building Society and Metro Bank (both outside the program).
The interest rates for the new tranche of 95% products are usually higher than for loans where the buyer has a larger down payment. Rachel Springall of Moneyfacts says it is important to seek financial advice as some of the deals may not be the best fit under the new system.
“It continues to be the case that if borrowers can afford to expand their deposit to 10%, they will find many more offers at lower rates, but understandably this may not be an option for some,” she says.
“There is significantly more room for improvement in choice for borrowers with as little as 5% deposit, but it will likely be a slow and steady process before we begin to see product quantities at levels that were prior to many lenders withdrawing in 2020 was observed. “
Under the system, borrowers cannot have an interest in other properties. While the maximum property purchase is capped at £ 600,000, which means a maximum loan of £ 570,000, some lenders have limited the mortgage offer to £ 500,000.
Value, not price
Borrowers should be aware that a lender offering a 95% mortgage will do so based on the lender’s rating, not price.
Sara Williams, author of Debt Camel blog, says your deposit may not be enough to buy the home you want.
“Let’s say you accepted an offer of £ 160,000 on a house, 5% of which is £ 8,000. So if you’ve saved £ 10,000 on a deposit, you might think that’s enough,” she says. “However, if the lender’s survey gives a rating of £ 155,000, they will only be lending 95% of that lower amount which is £ 147,250. So you need to find £ 12,750, which is £ 160,000 minus £ 147,250. “
Questions have also arisen as to how affordable it will be to buy a home even after the new system is introduced. Analysis by the Guardian Individual shoppers in their thirties, based on average UK wages, will continue to be barred from buying in around half of the local government in England and Wales.
Associated with this, according to Williams, are fears that the new system will lead to an increase in house prices. “There is a real risk that government support for 95% mortgages will simply increase house prices.
“It might not matter to the people who can afford to buy now. But it can mean first-time buyers will need even bigger deposits and mortgages in a few years, ”she says.
What the government system does not protect is negative equity when the property is worth less than the mortgage on it.
With a 95% mortgage, a small depreciation in the value of your home could mean you have negative equity. This can lead to difficulty moving home or some other fixed income deal if what you are on ends.
“Getting trapped in a house that is too small with negative equity can be very difficult,” says Williams. “So if this is a starter home and you expect to have to move in a few years with a growing family, this could be a real problem.”