In the budget last week, the most interesting thing to come out of it from a mortgage perspective was the “95% Mortgage Guarantee Scheme” which is set to launch in April. The aim is to help people buy a property if you have a 5% deposit, but it will also benefit everyone who has between a 5-15% deposit as you can read about below.
Here we are going to look at that in more detail at the 95% Mortgage Guarantee Scheme – how it works, what the knock on impacts may be etc, but if you want a more generalised round up, which does also touch on this topic, you are very welcome to watch the budget video.
What is the Guarantee?
As the name suggests, this is a guarantee that sits in the background, offered from the Government, to cover any losses a mortgage lender may experience if a borrower defaults on a mortgage when they put in a 5% deposit on a new property purchase, up to a value of £600,000. Currently there are very few options if you have a 10% deposit and even fewer for 5%. This scheme is designed to give mortgage lenders confidence to return back into this market with sensibly priced products. As the Government is offering to cover any losses, all the ‘big 6’ banks (Barclays, HSBC, Lloyds, Santander, NatWest & Nationwide) have agreed to work with this scheme and will launch products from April. As the ‘big 6’ account for around 85% of all mortgages in the UK this looks set to achieve the goal of bringing back 5% deposit mortgages to the high street.
How is it likely to work?
The beauty of this scheme is that as a borrower, you don’t have to do anything. This is very much for the lender and will give them confidence to start lending in this end of the market again. It is very clever as it costs no money now, but agrees to cover any future losses which tend to be minimal if you look at current mortgage default rates. Also, it is likely to push down pricing on mortgages where there is a 5-15% deposit as this guarantee sits between 80% to 95% of the property value. Currently these mortgages are being priced at quite a premium as so few lenders are in this space. With the ‘big 6’ coming in and vying for market position that is likely to drive down pricing. A deliberate synergy benefit of this scheme and why it is so clever. We have seen this work well with CBILS, Bounce Back loans etc in the commercial arena, so this is effectively a consumer version of that.
Does it restrict the property I can buy?
No. As above, this is purely a guarantee for the lender so it will not restrict the type of property you wish to buy subject to the lenders criteria. Unlike ‘Help To Buy’ which was aimed at New Build property, this is for any type of property and it is also worth bearing in mind, as there is no equity share element some lenders will be more cautious if you do want to buy a New Build property and may require a larger deposits for that, so it is worth speaking to an adviser before you kick off your property search.
How do I apply and who is eligible?
Again, nothing you need to do on this front. From April we will simply see 95% lending return and you will apply for a mortgage as per normal. Everyone is eligible as long as you fit the lender’s criteria. Loans are likely to be capped at 4.5x your income to benefit from the guarantee, but some lenders may choose to be more generous. We’ll wait and see on that but the main point is that anyone in this area will benefit with no catches or stipulations.
Will this drive up house prices?
That really is the question. This scheme is a re-run of something called ‘Help To Buy 2’ that ran from October 2013 to the end of 2016. This was launched for the same reasons – by 2013 mortgage lenders were not offering 95% mortgages as a legacy of the Credit Crunch and this successfully resolved that issue. We had a look at prices from the start of 2014 (from when this scheme would have kicked in) to the end of 2016, so 3 full years. What happened in that time? A 30.43% rise in prices in the London area according to the Nationwide House Price Calculator (see below)… now things were very different at that time than they are today. The economy is currently in much weaker position and due to Brexit house prices in London are now only back to where they were in 2016, so even if we do look set for a few years of healthy gains it is unlikely we’ll see the level of growth we saw in 2014-16. But after the last few years, it is very hard to try and predict what will happen with any great certainty. However, in 2021 with the stamp duty holiday and 95% mortgages set to return, that will undeniably push up prices but it hard to say by how much.
*Info taken from Nationwide’s House Prince Calculator (https://www.nationwide.co.uk/about/house-price-index/house-price-calculator)
Overall, we think the 95% Mortgage Guarantee Scheme is a great scheme and it will help a many people get onto or up, the housing ladder, which is always a good thing. As per the above point, it does look set to drive up house prices. They are unlikely to shoot up or create a bubble due to the wider economic issues, but for those that can, and what to buy, this will open the door to a lot more people.
So our recommendation would be – if you are in a position to, it makes sense to buy sooner rather than later as this year you will benefit from a Stamp Duty holiday and falling costs of mortgages to those with smaller deposit. If you would like to discuss how this may affect you specifically, please do get in contact with one of the team who will be very happy to help.