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95% Mortgage guarantee scheme

In the Spring 2021 Budget, Rishi Sunak announced details of a scheme designed to ensure low-deposit lending was more widely available to property purchasers.

The scheme will come as welcome news to many first-time buyers but it is important to understand that it is not limited to that particular group of purchasers.

Chloe Riva from our Northumberland team looks at what the scheme means for the property market:
What is a 95% mortgage guarantee?

The Government hopes that by offering a plan to guarantee mortgages, lenders will be encouraged to reintroduce low-deposit lending. Many financial lenders ceased offering high loan-to-value (LTV) deals during the pandemic, clearly, they were concerned, as many were, over how Covid-19 could impact job security and the economy.

Understandably financial lenders will view high percentage mortgages as being riskier, since they’re vulnerable to fluctuating house prices, with borrowers potentially ending up in negative equity (meaning they owe more than their home is worth) should the market fall.

The aim of the Mortgage Guarantee Scheme is to provide both confidence to the financial lenders and also to stimulate activity from those wavering whether to venture into the market.

The idea behind the new 95% home loans – requiring a deposit of just 5% – is that they will provide a real boost for many would-be homebuyers who were finding it too much of a struggle to scrape together 10%.
This will hopefully mean that buyers previously financially excluded from the housing market will now have a route to climb the rungs of the property ladder.

“The chancellors’ confirmation that buyers will be supported by government-backed, 95% mortgages is welcome news,” says Chloe.

“A lack of high loan to value lending impacts access to homeownership, which was compounded in 2020 as lenders cut back on higher loan to value lending. This impacted first-time buyers’ share of all housing sales in 2020, which fell to 31% – the lowest level since 2016.”

 

So how much deposit will I need?

Instead of needing a 10% deposit – and having to save £20,000 to buy a £200,000 home – you will now only need a 5% deposit. This means only having to amass £10,000 to buy that same £200,000 property.

For those looking to buy a more expensive property costing £500,000, the required deposit will now be £25,000, as opposed to £50,000 prior to the scheme.

With the upfront costs now lower as a result of the scheme, the cost of getting onto or moving up the housing ladder has reduced.

 

Is the scheme subject to any upper limits?

With the Mortgage Guarantee Scheme, loans will be available for properties worth up to £600,000.

Given this threshold, more buyers will be able to take advantage of the scheme in areas where property prices are relatively low. By contrast, in less affordable areas, take-up may be lower.

Equally, while the aim of the scheme is to help those finding it hard to pull together a deposit, you need to bear in mind that deposits are only half the equation. The other factor is borrowing capacity – and this is dependent on how much you earn.

Under current lending criteria, the most that banks are typically prepared to lend is no more than 4.5 times a buyer’s annual salary.

Based on this, in order to purchase a property costing the maximum of £600,000, with a deposit of just 5% (equating to £30,000), you would need to be earning £126,667 a year (to get you to £570,000).

With this in mind, 5% mortgages may do little to help solo buyers, or those on – or below-average earnings.

 

When does the scheme begin and end?

The Guaranteed Mortgage Scheme is due to launch in April 2021 – and will run until December 31, 2022.
Why is it being introduced now?

The Chancellor has said the move is about ‘unlocking’ homeownership. The hope is that this scheme – together with the stamp duty holiday extension – will offer a welcome boost for first-time buyers and those with smaller deposits.

There are also hopes that these initiatives will, in turn, offer a big boost to the property market, as well as the economy as a whole as it is accepted that the property market is a significant catalyst for the wider economy.

 

Which banks are taking part?

So far, lenders including Lloyds, Santander, NatWest, HSBC, and Barclays have all said they are looking to offer 95% mortgages once the scheme begins and it is expected that further lenders including Virgin Money are expected to follow suit soon after.

 

What sort of interest rates can borrowers expect?

As yet, no details of actual rates have been revealed, but generally speaking, rates on low-deposit mortgages tend to be higher than those on mortgages requiring a bigger deposit.

As a guide, given that you can currently expect to pay well over 3% for a mortgage at 90% LTV, it’s likely that 95% mortgages could be even more costly.

All you can do for now is wait and watch. But in the meantime, what we do know is that buyers will be able to fix their rate for ‘at least’ five years if they so wish, giving borrowers some sense of security that their rate won’t go up over the short term.

 

What are the risks with a 95% mortgage?

The big worry with lending at such a high LTV is that buyers risk over-stretching themselves.
Given these concerns, it’s important that lending is responsibly targeted, and that only those who can afford the repayments get access to the low-deposit deals

While more details are yet to be revealed, the expectation is that borrowers will still have to pass the usual strict affordability checks to ensure they are financially able to bear the risk.

 

Does the scheme only apply to first-time buyers?

Unlike similar schemes that have gone before, the Government Mortgage Guarantee is not limited to first-time buyers – nor just to new-build homes.

This means that both first-timers and home movers can take advantage of the low-deposit deals – though the scheme is likely to be most popular with those taking the first step onto the property ladder.

 

Who else could benefit?

Other buyers who could potentially benefit include existing homeowners wanting to trade up, or those looking to remortgage to release equity.

Will the scheme benefit the housing market by keeping things moving?
The expectation is that Government-backed 5% mortgages will help drive activity as the stamp duty holiday and Help to Buy scheme are wound down.

 

Could the scheme push up house prices in the long-run?

While the Mortgage Guarantee Scheme offers a welcome boost for buyers, the Government will clearly be monitoring the impact on house prices as well as other economic stimuli as we continue along the roadmap and beyond.

There are concerns that unless the supply of affordable housing is there to meet the increased demand, there’s a risk the scheme could inflate prices further – potentially pushing prices even further out of reach for some of the very people it was designed to help.

 

What does the Government say about the scheme?

The Chancellor says this is about turning Prime Minister Boris Johnson’s pledge to transform “generation rent into generation buy” into a reality.

Rishi Sunak told MPs: “Lenders who provide mortgages to homebuyers who can only afford a 5% deposit will benefit from a Government guarantee on those mortgages. This is a policy that gives people who can’t afford a big deposit the chance to buy their own homes.

Chloe summarised the scheme, saying: “In supporting those with small deposits the chancellor recognises that unlocking that particular group of buyers is key to widening homeownership for a part of the mortgage market that has been under-served and this will help to stimulate the market up through the price chain.”

“Our belief is that the northern housing market will see the greatest benefit with lower-value housing stock on average compared to that in the south of the country.”

Impact of Budget 2021 on the property market

On 3 March 2021, Chancellor Rishi Sunak announced that the Stamp Duty Land Tax (SDLT) holiday will be extended until 30 June 2021 after facing pressure to extend the deadline by three months amid concerns of a ‘cliff-edge’ come the end of March.

In the 2021 budget, Sunak confirmed that buyers hoping to make the most of the savings of the higher £500,000 nil-rate band will now have until the end of June to complete sales in England and Northern Ireland. From the end of June until the end of September 2021, the nil-rate band will reduce from £500,000 to £250,000.

This comes as a huge relief to homebuyers who were hoping to take advantage of the holiday, yet with the initial deadline looming, were not so optimistic about the transaction completing in time.

The holiday was intended as a stimulus for the property market, and many buyers were encouraged to enter the market as a result. Many homeowners escalated their plans to move in order to make the deadline and benefit from the tax relief. In fact, according to Zoopla, in the last quarter of 2020, there were over 140,000 more people in the process of purchasing a property than there were in the previous year, with an estimated 418,000 home sales progressing to completion.

Alison Kent, Branch Manager/Valuer at George F. White, says: “In the 2021 Budget, the Mr Sunak gave the housing market a double boost yesterday, in the form of the Stamp Duty holiday extension and 95% mortgages. Extending the Stamp Duty holiday until the end of June, then phasing it out until September should help avoid a sudden downturn in prices caused by the much-feared cliff-edge end.

“With the zero-rated Stamp Duty limit extended to £250k until the end of September and the average UK house price being £252,000, it means that thousands of people can benefit from this incentive – particularly first and second-time buyers”.

 

SDLT explained

The initial threshold is where SDLT starts to apply. If you purchase a property for under £500,000 before the June deadline, there is no SDLT to pay.

On purchases over the £500,000 threshold, buyers will pay a 5% SDLT on the portion from £500,001 to £925,000, 10% on the portion from £925,001 to £1.5 million, and 12% on any portion over £1.5 million.

 

Property or lease premium or transfer value

SDLT rate

Up to £500,000 0%
The next £425,000 (the portion from £500,001 to £925,000) 5%
The next £575,000 (the portion from £925,001 to £1.5 million) 10%
The remaining amount (the portion above £1.5 million) 12%

Visit gov.uk for more information

On property purchases from 1 July to 30 September 2021, the SDLT threshold on residential properties will be £250,000. From 1 October, and the SDLT threshold will be £125,000 for residential properties.

 

First-time buyers

From 1 July 2021, if you, or anyone else you’re buying with, are first-time buyers, or if the purchase price is £500,000 or less, you will get a relief that means you’ll pay less or no tax. You’ll also be eligible for this discount if you bought your first home before 8 July 2020.

 

Help to Buy

Announced in February of this year the scheme has been extended until the end of May to mitigate transactions that have been unduly delayed by the impact of the pandemic. The replacement scheme will still launch in April for new applicants.

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