The housing market took a major hit with the onset of the covid-19 pandemic at the beginning of 2020. With restrictions on movement and social distancing, physical house viewings became an impossibility. With uncertainty about the future, mortgage companies began to remove products as sales dwindled. However, a curious upshot of the situation was a rise in remote viewings. As things became clearer, the lenders – helped by the governments stamp duty holiday that reduced the taxes on sales – began to offer mortgages once more.
Now, with the vaccination program – as I write – having already serviced more than 30million of the UK’s adult population and with Prime Minister Boris Johnson’s ‘roadmap’ to recovery firmly in play, the housing market has taken a step forward. This has been further enhanced by a return of 95% mortgages, with government backing. Homes up to £600,000 can be purchased with a 5% deposit, a further incentive to buy. So, what does this mean for the first-time buyer? Let’s talk about what has come into play, and why buyers need to know about it.
What has Changed?
The UK government recognises the property market as a central part of the economy. With house sales coming to a halt, the economy – already in turmoil – suffered badly. The decision to put in place a stamp duty holiday was the first enticement for buyers. Put simply, when buying a house there is a proportion of tax based on the value that is payable. This has been revised to cover only homes above the value of £500,000 and has been extended until the end of June.
From April, the government has introduced a scheme involving 95% mortgages – we will explain in more detail what this means in the next section – with guarantees to banks and other mortgage lenders that it, the government, will shoulder the cost should borrowers default and there be insufficient equity remaining to pay the loan. The incentive is therefore with the lender to make such mortgages possible.
What does this mean for the first-time buyer, and why should they be considering purchasing a home now with a 95% mortgage? Next, we will explain what a 95% mortgage is, and why it is important.
What is a 95% Mortgage?
Mortgage companies need the buyer to meet certain criteria. One is that they must be able to put forward a deposit meeting a specified percentage of the purchase price. There was a time when a 100% mortgage – no deposit required – could be obtained. The property crash of the early 2000’s put paid to (and was at least partly a result of) this sort of mortgage.
In recent years, a typical first-time buyer mortgage would be an 85% mortgage. This means that the buyer must be able to put down 15% of the value of the property. Let’s have a look at what that means in monetary terms.
The average house in the UK costs around £250,000. With an 85% mortgage, the first-time buyer needs £37,500 as a deposit. In any circumstances that is a not insubstantial amount. With a 95% mortgage, that figure is reduced to £12,500 – an easier amount to reach for the average earner. From that simple calculation it becomes clear that 95% mortgages are going to encourage those first-time buyers who are currently unable to get together the higher amount to consider buying homes.
The general idea, as the government has mentioned, is to encourage those who are currently renting to put their money into bricks and mortar and get onto the property ladder. Who is this scheme likely to appeal to?
Should I Buy Now?
The 95% mortgages will be available for first-time buyers and also to existing homeowners. However, the are caveats attached. Applicants must – as with all mortgages – be able to prove that they can afford the monthly repayments on the mortgage. This will require a detailed income and outgoings analysis with proof presented to the lender. The lender will then assess the application and either grant the mortgage or, should the applicant fail to meet the criteria, reject the application. It should come as no surprise that lenders will be extremely strict in accepting applicants for 95% mortgages.
However, for young professionals and other in full-time employment this scheme – coupled with the stamp duty holiday – makes now the right time to start looking at the financial possibilities of buying a home. Renting is the preferred choice for many as it is easier to get together the one month, for example, deposit than the 15% of the property price needed for an 85% mortgage. With only 5% required, there is greater scope for young people to get their feet on the property ladder by purchasing their own home.
What Does This Mean for the Market?
There is no doubt that this move by the government will be a boost to the property market. It is something of a risk for the government, yet as it is not so for lenders it allows mortgage companies to start offering more attractive packages to first-time buyers. Normally, the mortgage company lends on the understanding that it can repossess the property should the borrower default. The problem with this is that a crash in the market means potential losses through negative equity.
By guaranteeing 95% mortgages, the government is essentially taking that weight off the lender’s shoulders. The borrower will see little change other than the reduced deposit requirement, as what is being offered is a standard mortgage.
Should you buy now if you’re a first-time buyer? This is perhaps the best time to start your journey into property ownership as you will benefit from the dual concessions of the stamp duty holiday and the 95% mortgage. As far as affordability goes, this is the most affordable opportunity that has been offered for many years. Remember that the stamp duty holiday closes at the end of June, so it is essential you act fast to take advantage of the present situation.