95% LTV Mortgages: Pros & Cons for First-Time Buyers

Prime Minister Boris Johnson has announced a new 95% LTV (loan-to-value) mortgage scheme to help first-time buyers get on the property ladder – but is it a good idea?

Lead image: Ketut Subiyanto from Pexels

Just before the start of the Conservative party’s virtual conference in early October, the Prime Minister, Boris Johnson, announced that he would be launching a new 95% LTV (loan-to-value) mortgage scheme and that the normal stress-test rules would not apply.

His scheme aims to help first-time property buyers by significantly reducing the size of deposit they need to get on the first rung of the housing ladder – good news among all the doom and gloom.

Johnson explained that during the pandemic there has been a lack of high LTV mortgages, which he wants to put right. In an interview with the Daily Telegraph, he said: ‘I think a huge, huge number of people feel totally excluded from capitalism, from the idea of home ownership, which is so vital for our society. And we’re going to fix that – “Generation Buy” is what we’re going for.’

He went on to describe the move as ‘revolutionary, particularly for young people’ and said that now was the time to ‘take forward one of the key proposals of our manifesto of 2019: giving young, first-time buyers the chance to take out a long-term, fixed-rate mortgage of up to 95% of the value of the home – vastly reducing the size of the deposit’.

“The PM is keen to turn ‘generation rent’ into ‘generation buy’”

Certainly, the PM is keen to turn ‘generation rent’ into ‘generation buy’, and the new 95% mortgages scheme will help struggling first-time buyers, especially if the current borrowing rules are eased.

In reality, this will enable many on lower incomes to be able to secure a mortgage and the Government will give a ‘state guarantee’ to mortgage lenders.

Substantial 85% mortgages requiring a 5% deposit have been available in recent years, but since the COVID pandemic earlier this year, many major lenders including HSBC and Santander have stopped offering such deals.

The Prime Minister’s move will be warmly welcomed by first-time buyers, who are finding things particularly difficult. There are two reasons for this – the withdrawal of low deposit mortgages and swiftly rising house prices. Together they have prevented many first-time buyers from getting on the property ladder.

Saving for a deposit for a house can take five years

Currently, saving for a deposit can take years (photo: maitree rimthong from Pexels)

The new LTV mortgage scheme will be funded by the tax payer. The finer details of the scheme are currently being worked out by ministers, but the new lending criteria will lower the financial barrier.

In reality, this will mean that first-time buyers will be able to save on average £18,000 on the amount needed for a deposit. Currently in London, the average deposit is 26%. With the reduction of 19% to just 5%, buyers would need £88,000 less for a deposit on their first property.

In the north-east, where the average deposit is 14%, this will mean a drop of 9% to 5% and, on average, first-time house buyers will need £10,000 less for the deposit on their first property.

However, while the amount of money required upfront will be much less, first-time buyers will be borrowing greater sums of money for their house purchase, meaning they will pay more interest in the long term.

Although the LTV mortgage scheme will ease the property situation, it also highlights the need for more affordable housing for first-time buyers. To try and address this problem, the government has also created the Affordable Housing Programme (AHP), which will fund up to 180,000 homes between 2021 and 2026.

‘Currently in London, the average deposit is 26%. With the reduction of 19% to just 5%, buyers would need £88,000 less for a deposit’

There is some speculation that the small print could impose some restrictions on price thresholds, earnings or on certain locations. Nevertheless, the new scheme will be welcomed by many including Kate Davies, Executive Director of the Intermediary Mortgage Lenders Association: ‘Enabling borrowers to buy with 5% deposits would help to open up the mortgage market beyond just new-build, which has got to be a healthy development.’

Jonathan Rolande, Director of ‘we buy any house’ company House Buy Fast, said: ‘Anything to ease the burden on the bank of mum and dad is a welcome sign! It’s about time young people were presented with a viable route to owning a home.’

Richard Colville, director of the ThinkTank Centre for Policy Studies, is also optimistic: ‘Home ownership is a near-universal aspiration in the UK, yet the younger generation has been left behind… fixed-rate, long-term, low-deposit mortgages are key to helping first-time buyers to afford a home.’

Certainly the current Stamp Duty Holiday has had a huge impact on the property market and the LTV mortgage scheme will no doubt have a similar one – which will be great following lockdown.

However, this increased demand will no doubt push house prices up, which is exactly what first-time buyers don’t need – it’s a Catch 22 situation!

To calculate the mortgage you can get with the LTV mortgage scheme, try the handy calculator online at moneyfacts.co.uk.



 

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