Government support for homebuyers with a small deposit has prompted a flurry of enticing offers. But buyers should go in with their eyes wide open.
It was billed as a way to give prospective homeowners access to the housing market. When the chancellor Rishi Sunak announced a mortgage guarantee scheme to encourage banks and building societies to lend to people who can only afford a 5% home deposit, he heralded it as a way of turning “generation rent to generation buy”.
The move, launched last week, has prompted a flurry of new mortgage products on to the market, both within and outside the scheme. But buyers have been warned that they may be paying a higher interest rate for the new loans than if they would if they had a bigger deposit.And then there is the concern that the guarantee may prompt increases in house prices, leaving future generations having to borrow even more. Or they could drop and plunge people into negative equity.
Others have welcomed the new scheme. “The launch of various 95% options for borrowers is hugely positive and will help many people who could otherwise not have been able to get on to the housing ladder,” says Mark Harris, chief executive of mortgage broker SPF Private Clients.
A new market
When the pandemic hit, mortgage providers, fearing for the economic repercussions from Covid-19, largely pulled deals where buyers needed a deposit of just 5%. In March last year, there were 378 mortgage products available, according to financial information site Moneyfacts, but these largely disappeared.
Last month, Sunak announced the scheme whereby the government would guarantee the 95% loans. Under this scheme, the government guarantees a portion of the mortgage if the borrower goes into default.
The news alone was enough to encourage some lenders to return to the market – in March Yorkshire building society started offering a 95% deal without using the government guarantee. Last week, lenders using the guarantee started to launch products, most of which are on fixed terms of two years.
Figures from Moneyfacts show the best value offering as a Halifax two-year fixed mortgage at 3.73%, with an arrangement fee of £999.
Outside the scheme, Barclays’s Springboard five-year fixed mortgage offers 3.45% interest, although it requires a guarantor.
The best five-year fix without a guarantor is 3.89% from Coventry building society and Metro Bank (both outside the scheme).
The rates on the new tranche of 95% products are typically higher than for loans where the buyer has a bigger deposit. Rachel Springall of Moneyfacts says it is important to seek financial advice as some of the deals under the new scheme may not be the best fit.
“It continues to be the case that if borrowers can afford to stretch their deposit to 10% they will find many more deals at lower rates, but, understandably, this may not be an option for some,” she says.
“There is clearly much more room for improvement in choice for borrowers with just a 5% deposit, but it’s likely to be a slow and steady process before we start to see product volumes at the levels seen before many lenders withdrew them in 2020.”
Under the scheme, borrowers can’t have an interest in any other property. While the maximum property purchase is capped at £600,000, meaning a maximum loan of £570,000, some lenders have capped the mortgage offer at £500,000.