The first-ever drought in mortgages for first-time buyers will end with the start of a glut in cheap 95% loans.
After the number of high loan-to-value (LTV) deals available fell to five, chancellor Rishi Sunak pledged to support banks so that they can offer more of the 405 shows to choose from a year ago for those who put down a 5% deposit.
It is now expected that sales will increase and interest rates will be lowered. By the time the initiative ended in 2016, a nearly identical scheme to Sunak’s new Help to Buy mortgage guarantee had increased the number of purchases by those with a deposit of less than 10% from 61 per day to 289 per day.
While no rates have been announced, Lloyds, NatWest, Santander, Barclays, and HSBC have announced that they will offer 95% loans starting in April, with Virgin Money to follow. Nationwide, the UK’s largest building society has stated that it will not participate.
The government will underwrite 20% of any home loan offered at 95% LTV under guarantee. In theory, this means that banks could offer nearly as low rates as those offered to borrowers who only require loans of up to 75% of the value of their home.
If you have a 5% deposit, you can get a two-year fixed rate of 4.14 per cent, while if you have a 25% deposit, you can get a 1.54% rate.
Banks will be charged an undisclosed fee to use the government guarantee, but it is expected that they will still offer lower-cost loans than are currently available. According to one analyst, first-time buyers could pay around 3%.
Any loans backed by the mortgage guarantee will not have the exact stringent requirements as the five 95% loans currently available. For example, Family Building Society requires family members to co-sign the mortgage, whereas Furness Building Society only lends on properties in specific postcodes. Saffron and Penrith building societies and Barclays are the other three lenders, with rates ranging from 3.45 per cent to 4.17 per cent.
The new loans will be available until December 2022 on homes costing up to £600,000 and open to both first-time buyers and home movers. Fixed rates for five years will be available.
The scheme will run alongside the Help to Buy equity loan scheme in England and Wales, which is limited to first-time buyers, new-build properties, and regional price caps. According to experts, it will only work if it lowers rates, though more competition should lower prices anyway.
“The mortgage guarantee must result in a significant reduction in mortgage rates for those with low deposits, or it will be worthless,” said Anthony Codling, the founder of Twindig, a property data website.
“It has to assist those it was designed to assist, generation rent, who are struggling to get on the housing ladder.”
Lenders are still apprehensive. When the furlough scheme ends, one high street bank predicted a drop in property prices as the pandemic’s true impact becomes clear. It also expressed concern that it would be unable to meet demand from first-time buyers.
The program has the potential to reduce mortgage payments significantly. Lower interest rates could save a first-time buyer of a typical £210,000 home £165 per month, according to Hamptons, assuming they pay a rate of 1.75 per cent instead of 4.07 per cent. On a 25-year term, monthly payments would drop from £880 to £715 per month. The required joint income to secure a deal will drop from nearly £40,000 to just over £30,000.
In Wales, where the average first home costs £159,106, monthly payments would be reduced by £188 to £540.
The monthly payment in Yorkshire and Humberside, where the average first-time home costs £156,387, would be £531 — £184 less. “When it was introduced after the last financial crisis, the guarantee worked well,” said David Hollingworth of mortgage broker London & Country. “It makes sense to dust off a model that has previously been shown to work.”
Source: The Times