Mark Gee, director of Premier Choice Mortgages, explains how first-time buyers can get on the property ladder with just a 5% deposit, even though the government’s Help to Buy Mortgage Guarantee scheme has ended
Last year saw the demise of the much heralded Help to Buy Mortgage Guarantee scheme, which was introduced in October 2013 and considered one of the government’s flagship policies. The Council of Mortgage Lenders has said that the scheme had worked ‘’exceptionally well’’ allowing lenders to design more products for the mortgage market.
Under the scheme, borrowers were able to apply for a mortgage with a 5% deposit. If the borrowers defaulted on their payments, the government guaranteed to compensate the lender. But there has been such a low attrition rate – up to 30 September 2016 the scheme had only cost the government around £17,000 with just two homeowners defaulting on their payments.
The guarantee to lenders on the Help to Buy Mortgage Guarantee scheme lasts for seven years after the mortgage is taken out. So the real cost to the government will not be known until June 2024.
Another government scheme called the Help to Buy Equity Loan scheme is still running – see page 30 for more details on that.
High risk
Mortgages that require only a 5% deposit are deemed to be ‘high risk’ because the borrower has only contributed a small amount of their own money towards buying the property. If it needs to be repossessed in the future, the lender might not get back all the money they lent if, for example, the value of the property falls.
So has 2017 seen an end to the first-time buyer, and an end to lenders’ appetite for offering high risk products? The answer to both questions is a resounding no.
First-time buyers
The government has introduced policies designed to slow down the buy-to-let market, with an increase in stamp duty for second properties, and changes to taxes for landlords. This has contributed to helping the first-time buyer back to the housing market.
According to Connells Survey and Valuations, first-time buyers now account for 36% of market activity, up 8% on the previous year.
In contrast, buy-to-let investor share has almost halved during the same period. It now accounts for only 8% of purchases, the lowest level for five years.
Lenders have continued to fuel the first-time buyer market by providing 95% loan-to-value (LTV) mortgages.
These are mortgages that require just a 5% deposit, so prospective buyers can get on the housing ladder with a relatively small down payment.
For example, the average price of a starter home for first-time buyers is £183,385 today. This would require a typical borrower to find a deposit of £9,169, with the remaining £174,216 funded by a mortgage.
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Help to Buy ISA
One option for people saving up to buy their first home is to put money away in a Help to Buy ISA, as thegovernment will boost your savings by 25%.
You can save up to £200 a month and the government will give a bonus of £50 on that. To kickstart your account, in your first month, you can deposit a lump sum of up to £1,200.
The minimum government bonus is £400, so you need to save at least £1,600 into your Help to Buy ISA before you can claim your bonus. The maximum bonus is £3,000 and to receive that, you will need to save £12,000.
These accounts are available to each first-time buyer, not each household so if two of you are buying together, you could receive a government bonus of up to £6,000 towards your first home.
The bonus cannot be used for the deposit, or to pay for estate agent fees, valuation fees and legal fees or any other indirect costs associated with buying a home.
When you are close to buying your first home, you will need to instruct your solicitor or conveyancer to apply for your government bonus. Once they receive the government bonus, it will be added to the money you are putting towards your first home. The bonus must be included with the funds consolidated at the completion of the property transaction.
The Help to Buy ISA is available from banks, building societies and credit unions.
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Help to Buy ISA
The deposit could be funded with the popular Help to Buy ISA, which allows investors to deposit up to £3,000 with a 25% bonus, provided by the government, if you meet the scheme’s criteria (see box above).
Many first-time buyers have funded their deposit with help from the Bank of Mum and Dad or have been gifted deposits from relatives.
There are many first-time buyers who are not as fortunate to have their deposit gifted to them or who have managed to save in a Help to Buy ISA, however. These borrowers could join their finances together and save for the deposit.
Many renters decide to move back to their parents with a high percentage of them stressing that the decrease in outgoings has helped them save for their dream home.
Once the deposit has been accumulated and the dream home found, then the next daunting task is choosing the lender.
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Case study: Lewis and Hannah’s story
When starting the daunting process of buying a home for the first time Lewis and Hannah White started by exploring what financial options would best be suited to their needs.
This is what Lewis had to say: “We had saved for a year-and-a-half using the government Help to Buy ISA, which provided us with our first opportunity to receive some support in the challenging housing market of today.
While continuing to save hard, a year on, we decided to arrange an appointment at a bank to discuss applying for a 95% mortgage. This resulted in being told our credit checks and information did not qualify us to apply for this particular mortgage making the possibility for us becoming homeowners very slim.
“Continuing to save, we decided not to lose momentum and started looking at houses to get an idea of what we could afford based on our current savings. It was at this point we decided we needed support in the buying process.
“We wanted an experienced professional to advise and guide us through the process and help us get the right house. This is when we started correspondence with Premier Choice, a recommended and local business who immediately offered insight without judgement – something which we felt was present in many previous mortgage meetings.
“We went through a thorough process to check our viability and prospect of getting a 95% mortgage providing identical information to previous banks. To our surprise, we were finally informed of the positive news that we were perfect clients to receive a 95% mortgage and could start house hunting with a mortgage in principle.
“Premier Choice guided us on a day-to-day basis with application updates and other information. It gave us a stress free process and the guidance we needed to complete this unfamiliar process smoothly; we had previously found ourselves stressing about all the unknown products and processes of getting a mortgage.
“Now we are close to completing the process to buying our first home and are very thankful for all the help we received from Premier Choice. The media is very quick to say that buying a home in the market is near impossible for young people like us. Yes, the housing market is overvalued but no, it’s not impossible. Save your money and get support from local mortgage advisors which see past personal gain and actually care about their client.”
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Finding the right lender
Mortgage criteria has tightened considerably over the last 18 months, with the Mortgage Market Review being the latest and arguably the most far reaching change to mortgage regulation. Products are now designed to ensure borrowers can demonstrate affordability even in the event of any future rate rises.
As of March, there is plenty of choice in the UK mortgage market with over 25 lenders offering 95% mortgages with a total of 116 different schemes available.
The first decision you will need to make when choosing a 95% mortgage is whether to go for a fixed, tracker or variable interest rate deal.
The most popular mortgage scheme available is currently a fixed rate with new buyers choosing deals of two, three or five years.
Most borrowers today indicate that they prefer to budget their cost over a set period so they don’t have to worry about monthly repayments changing due to interest rate fluctuations.
So are all lenders’ 95% mortgages the same? Certainly not, criteria can vary greatly and understanding the complexity of each lender’s policy can be a financial ‘minefield’ for the consumer.
Identifying the right mortgage scheme?
This can be difficult. As it stands, around 70% of borrowers choose to seek professional advice from a mortgage broker or financial adviser to help them find the right product. The remainder also usually consult an adviser at their local bank or building society.
As lending criteria does vary you will need to consider the following points when deciding which lender best suits your circumstance.
How much can I borrow?
In the past, lenders traditionally calculated the amount you could borrow as a multiple of salary. Now though, most banks and building societies look at affordability based on your financial income and outgoings, and they will review your credit score before deciding on a figure.
Student and credit loans are not necessarily a problem as they are generally factored into the affordability calculator, however, payday loans are frowned upon by the lenders.
The figure will change depending on the lender and a good mortgage broker will research the most appropriate lender for your needs.
Which mortgage broker should I use?
You will need to establish how much the broker is going to charge you.
Does the broker cover whole of market, i.e. can the broker access all lenders, or is it limited to a network or smaller panel of lenders?
Does the mortgage broker have access to exclusive deals from lenders?
Is the broker available to discuss your mortgage outside of normal working hours?
Does the broker specialise in new build?
A good mortgage broker will explain everything to you in plain language, collect all the required documentation from you, assess your needs and recommend the right lender and scheme. They should keep you informed of any lender requirements, timescales and liaise with your solicitor.
What are the risks with a 95% mortgage?
Your mortgage broker, bank or financial adviser should explain the risk attached to taking out a mortgage.
You should be aware that a mortgage is a loan secured on your new property and your home may be repossessed if you do not keep repayments on your mortgage.
Mark Gee is director at Premier Choice Mortgages,
a mortgage broker firm based in Witney, Oxfordshire.
