What Does the Government Backed 5% Mortgage Scheme Mean?

Being a Derby first-time buyer in the last 12 months has not been an easy thing. Just before lockdown there were around 400 ‘5% deposit mortgage’ deals and first-time buyers were able shop around to get the best deal. When the first lockdown hit, 5% deposit mortgages disappeared, meaning that as many Derby would-be first-time buyers were about to buy their first Derby home in 2020, the rug was pulled from under their feet.

Today, you can count on two hands the number of mortgage deals which allow a 5% deposit. Even worse, the number of hoops one has to jump through to get a 5% deposit mortgage is very high. On top of that, you have to pay handsomely for the privilege, with mortgage rates of at least 4.15%.

 

Quick Terminology

In putting down a 5% deposit, you borrow the remaining 95% as a mortgage. These 95% loan to value (LTV) mortgages were very popular with Derby first-time buyers before the Credit Crunch.

In fact, nearly 1 in 6 mortgages were 90% to 95%+ Loan to Value mortgages in 2007, yet as the Global Financial Crisis hit in 2008/9 that dropped to only 1 in 63 mortgages being in 90% to 95%+ range in 2010 – meaning many Derby first-time buyers were unable to buy their first Derby home between 2010 and 2015.

The Government Scheme

In the recent budget, Rishi Sunak has vowed to back the building societies and banks so that they can offer more of these higher 95% Loan to Value mortgage deals.

Many people have said this will mean there will be a Derby house price boom – especially as Stamp Duty is extended until 30th September.

This scheme is nothing new as a practically identical scheme was launched by George Osborne in the 2013 Budget with his Help to Buy Scheme. Nearly 1 in 5 houses sold in the year after that budget used this scheme, yet Osborne’s was only for first-time buyers and it was only for brand new homes, not ‘second-hand’ homes. Whilst there is no doubt this caused an increase in house purchases, many commentators said it was a backdoor method to keep the country’s new homes builders afloat.

The big difference with this new 2021 scheme is that it is available for Derby second-hand homes as well and is open to all Derby owner occupiers moving home

Yet, what will the banks mortgage interest rate charge be?

Although no building societies or banks have yet publicised what mortgage rates they will charge, all the High Street lenders including NatWest, Santander, HSBC, Virgin Money, Barclays, and Lloyds have stated they intend to offer these 95% LTV mortgages.

Under the Government’s mortgage guarantee to the banks, Westminster will guarantee 20% of any mortgage offered at 95% Loan to Value. In principle, that means that building societies/banks should be able to offer the low mortgage rates as those available to people wanting to borrow 75% Loan to Value.

At the moment the average five-year fixed rate mortgage is 3.6% with a 10% deposit, but if you have a 25% deposit, you can fix it for five years at 1.63%

However, don’t forget though that the banks will be charged a ‘still to be decided’ amount to use the Government guarantee. On the last Help to Buy Scheme, it was rumoured they were charged 0.9% of the mortgage borrowed, so this cost would have to be passed on to the first-time buyer. I would suspect the eventual rates Derby first-time buyers will have to pay is in the region of 3%.

This new 95% mortgage/5% deposit scheme is only going to work if banks and building societies have sensible mortgage rates as it needs to help those Derby first-time buyers it was intended to help, who are finding it hard work to get on the first rung of the Derby housing ladder.

It all comes down to how anxious the banks and building societies feel about the true long-term effect of the pandemic once the furlough scheme ends in the autumn. Only time will tell.

 

Mortgage Examples

Yet, to give you an idea of the difference the mortgage rates scheme will make on a typical Derby terraced/town house …

The average price paid for a Derby terraced/town house in the last 12 months was £147,000

Assuming a 35-year repayment mortgage and borrowing that amount on each scenario:

  • At the current best 95% LTV mortgage rate (i.e. 5% deposit) of 4.15% mentioned at the start of the article, that would cost £664 per month in mortgage payments
  • At the current average 90% LTV mortgage rate (i.e. 10% deposit) of 3.6% mentioned in the middle of the article, that would cost £616 per month in mortgage payments
  • At the best 75% LTV mortgage rate (i.e. 25% deposit) of 1.63% mentioned at the start of the article, that would cost £459 per month in mortgage payments

As you can see, quite a difference.

 

A Timely Boost

I have to applaud Rishi Sunak for this initiative, yet will it be ‘fields of clover forever’ for the Derby property market with the new scheme?

No, it won’t.

It will be a good boost to the local and national property market. Whilst the mortgage guarantee offers a small portion of security for the lenders, it does focus on the riskiest part of the housing market. Many lenders still have cold shivers of the Northern Rock 125% mortgage debacle from a decade ago and those memories still ring true today.

The fact is that these types of mortgages will be a higher risk, even if the Government are underwriting them with their smaller deposits, which will come through in bank’s and building societies higher pricing for these mortgages. Also, the lenders are already at near full capacity trying to get hundreds of thousands of existing property sales and purchase deals through because of the Stamp Duty rush over the last 9 months. I await the rates in early April and will make comment again.

If you are a Derby homeowner, potential Derby first-time buyer or anyone involved in the Derby property market and you would like to chat about anything I’ve covered in this article or any of my other articles on the Derby property market, please don’t hesitate to drop me or a member of our team a line.