Budget 2021: 95% Mortgage Guarantee Scheme To Launch
On 3 March 2021, Chancellor Rishi Sunak announced a new mortgage guarantee scheme for first-time buyers and home movers in his Budget speech. The scheme is to involve the government offering a guarantee to banks to encourage them to offer 95% mortgages to borrowers, helping them buy a home with just a 5% deposit.
The scheme is set to run from April 2021 to 31st December 2022, with all residential properties priced up to £600,000 eligible.
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What Is A 95% Mortgage?
A 95% mortgage is a loan for 95% of the value of a property. The buyer must save up a 5% deposit to cover the rest.
So for example, if you wanted to buy a house worth £200,000 and take out a 95% mortgage, you would have to put down £10,000 of your own money and borrow the remaining £190,000.
You may see 95% mortgages described as ‘95% LTV’ mortgages. LTV stands for loan-to-value and simply means the percentage of the property’s value that’s being covered by the mortgage.
Can I Get A 95% Mortgage?
In theory, 95% mortgage deals are available to both first-time buyers and home movers. However, just like with any other mortgage, you will still need to prove that you earn enough to meet the monthly mortgage repayments as well as all your other ongoing expenses. All lenders will still perform a stringent affordability check before considering lending you money.
Affordability testing Your salary is the starting point in any mortgage application, but it’s not the only factor lenders take into account. They will assess the full range of your income, outgoings and any debt, among other things, when working out whether you can afford monthly repayments. They will also ‘stress test’ your finances, making sure you could still afford the mortgage payments if interest rates were to fluctuate.
To be in with a chance of qualifying for a 95% mortgage, you must also have a good credit score. You must have a proven history of paying bills, loans and credit cards, rent on time. Registering on the electoral roll is a must and boosts your credit score.
What If I Am Furloughed?
If you are currently furloughed due to COVID-19, lenders will usually only take your furloughed income into account, though some may be more flexible especially if you can produce a letter from your employer to say they’re paying you 100% of your salary or that you’ll be returning to work on a specific date.
How Much Can I Borrow?
Theoretically speaking you could borrow up to five times your salary (or combined salaries if buying with another person) with a 95% mortgage.
For example, if, like in the above example, you had saved a 5% deposit of £10,000 for a £200,000 home, you would usually need a salary of at least £38,000 (or a combined salary of the same amount) to be able to borrow the remaining £190,000, although the actual amount you will be able to borrow will vary depending on the lender and your personal circumstances.
Some lenders place caps at 4.5 or 4.75 times your annual income.
95% Mortgage Rates And Availability
The impact of the pandemic on the economy over the past year has up until now, made it much harder to get a 95% mortgage. As of February 2021 there were only three offers available, down from 273 in March 2020. However, the government’s recent announcement that they will be launching a 95% mortgage guarantee scheme has prompted several major banks to launce new deals from April 2021.
What About Mortgage Rates?
Rates on 95% mortgages are usually around the 0.7%-1% mark, more expensive than 90% deals meaning that If you are able to save a bigger deposit, then you could benefit from far lower monthly repayments.
There is also a degree of uncertainty over the direction of house prices in the next few months after such a huge surge over recent months; A drop in house prices would make low-deposit deals more risky since borrowers could potentially be left in negative equity.
How Will This Work For The Lenders?
Lenders stopped offering 95% mortgages as the economic forecast deteriorated during 2020, due to the fact that they are higher risk products.
People with lower deposit have been missing out as banks chose to focus on perceived higher quality loans. However, these new 95% mortgages will be guaranteed by the government, removing the risk from lenders.
Which Lenders Will Offer The 95% Mortgages?
In his budget speech, the Chancellor said that “several of the country’s largest lenders including Lloyds, Natwest, Santander, Barclays and HSBC will be offering these 95% mortgages from next month.”
He also said that “more, including Virgin Money will follow shortly after.”
Ao the above, big names, may have already committed themselves, but some agents remain sceptical about how widespread the uptake will be among lenders:
“Banks have demonstrated a reluctance to lend in this market during the past twelve months, partly due to the sheer volume of business at lower LTVs and partly due to concerns over the outlook for jobs,” said Oliver Knight, head of residential development research at Knight Frank.
“Though that outlook is improving, the success of the scheme will depend on how many lenders take it up, on top of those announced so far, and what pricing they adopt. The government will be hoping the guarantee will significantly stimulate appetite to lend in that space.”
Are There Risks For Buyers?
With the UK housing market uncertain for the coming years, there is some concern that low-deposit mortgage buyers could be at risk of falling into negative equity.
If house prices were to fall, buyers who took out a 95% LTV mortgage would be more likely to owe more than their house is worth. Negative equity makes it difficult (or impossible) to sell or remortgage a home, proving a risk to new buyers hoping to climb the property ladder
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