Understanding the Government’s New 5% Deposit Mortgage Scheme

As I am sure you are all aware, the Prime Minister recently pledged to turn generation rent into ‘generation buy’ by giving young first-time buyers the chance to take out a long-term fixed-rate mortgage of up to 95 per cent of the value of the home.

During his speech, Borris Johnson said; “We believe that this policy could create two million more owner-occupiers, the most significant expansion of homeownership since the 1980s.

“We will fix the long-term problems of this country not by endlessly expanding the state, but by giving power back to people – the fundamental life-affirming power of homeownership, the power to decide what colour to paint your own front door. With our long-term fixed-rate mortgages, we want to spread that opportunity to every part of the country.”

Contact me here

The current scheme expires at the end of March but is being replaced by a new Help to Buy programme, running from April 2021 to the end of March 2023.

It is restricted to first-time buyers and will include regional price caps.

It still remains to be seen how the scheme announced by the Prime Minister will differ from the existing ‘Help to Buy’ scheme. That said, I thought it would give you my understanding of the scheme and hopefully answer some of your queries.

The New Help To Buy scheme

Many experts are suggesting it could be similar to the previous Help To Buy scheme, which saw first-time buyers benefit from 5% deposits. With this, homebuyers could borrow up to 20% of the value of the property they wanted to buy from the government or 40% in London.

The loan would then be interest-free for five years, with property owners offered different ways to pay it off.

These include adding the loan to their mortgage, paying it off when selling the house, or paying it off in cash instalments.

Meanwhile, the Telegraph recently reported that the PM has asked Ministers to draw up plans which could see banks remove 'stress tests' which were introduced after the financial crisis of 2008/09.

This means those who want to take out a mortgage will have to adhere to fewer criteria to secure a loan from the bank.

What is a 5% deposit mortgage?

A 5% deposit mortgage means you put down 5% of a property’s worth and borrow the remaining 95%.

Mortgages like this are described as having a high Loan to Value (LTV) ratio because the amount of the deposit is so much smaller than the total value of the property.

Products like this are popular among first-time buyers who don’t have a large deposit or any equity in an existing property they can transfer.

The amount most lenders will allow a buyer to borrow is typically around 4.5 times their annual salary, or combined income if more than one person is buying together.

This makes it difficult for many young people on lower-paying jobs, in particular, to be granted a mortgage – even if they have been able to put together a deposit, lenders may refuse them because they don’t earn enough.

Before the coronavirus pandemic, there was a wide range of 5% deposit mortgage deals on offer, but this has since plummeted, with banks and building societies tightening lending criteria.

How could the new scheme help first-time buyers?

The Prime Minister said in his speech: “We need to fix our broken housing market.

“When Covid struck there were millions of people, often young people, who found themselves locked down in rented accommodation, without private space, without a garden, forced to use ironing boards for desks and bedrooms for offices.

“I know that many people are of course happy with renting and the flexibility that it offers. But for most people, it is still true that the overwhelming instinct is to buy.”

As well as removing the majority of 5% deposit mortgage products, lenders have tightened their criteria, for example, on lending to the self-employed.

Most homebuyers are now being required to provide deposits of at least 15 to 20% of the value of the property they are buying.

It has been reported that the Government’s new scheme will include ways to remove stress tests for mortgage applicants, which means potential buyers could see more opportunities open up.

But buyers must still be able to afford the home they want to buy, say experts.

Currently, those who want a loan have to undergo assessments on their income, expenditure and existing debts, an examination of future income, and 'stress tests' to see if they could keep up with repayment if rates were to rise.

Under new plans, this could potentially be relaxed, while a form of 'state guarantee' to lenders would be increased to balance out the risk.

This could be a way to encourage more banks to start lending to small deposit borrowers again.

Well, I hope this article is able to help a few of my readers. If you have any questions or would like to add anything to this post, please feel free to contact my using my details below.

More than just an estate agent…

I’m Gary Lintorn - Let Me Get You Moving...

gary@garylintorn.com

01322 555 000

07985 106832