Will the government-backed 95% mortgage guarantee scheme help buyers in Bolton and Bury?
Last month, the Government launched a scheme to guarantee 95% loan-to-value (LTV) mortgages. The scheme is designed to make owning a property more affordable by encouraging lenders to offer mortgages to homebuyers with smaller deposits.
With many (but not all) lenders now offering 95% mortgages with a government guarantee, does the scheme offer good value, or are there better options available to buyers in the local area?
Why was the 95% LTV mortgage guarantee scheme needed?
The UK’s first COVID lockdown had an immediate impact on the property market, effectively freezing all viewings, purchases and conveyancing as property professionals adjusted to new restrictions.
Anxious about the economic consequences of the pandemic, many lenders restricted the availability of mortgages to buyers with smaller deposits.
As the first lockdown eased, the market quickly recovered. However, major delays developed throughout the conveyancing process, as solicitors, surveyors and lenders struggled to manage with social distancing, homeworking and furloughed staff. Throughout 2020, the market remained buoyant, and lenders loosened some restrictions.
Although the UK has begun to “unlock”, most of the Government’s economic measures to reduce the impact of lockdowns remain in place. The impact of phasing out these support measures on the property market remains uncertain, but the Government’s new mortgage guarantee scheme is designed to offset some of this uncertainty.
How does the scheme work?
Property prices remain sky high in many parts of the UK, and the market shows no sign of slowing down.
Although interest rates are historically low, rising prices and the impact of the COVID pandemic has left many prospective homeowners unable to afford to buy in their local area.
The new Government-backed mortgage guarantee scheme will compensate lenders if the lender makes a loss in the unlikely event of a property being repossessed.
The scheme’s protection is intended to give lenders the confidence to offer 95% mortgages during this unpredictable property market.
Lenders must pay a commercial fee to the Government for each mortgage they provide under the scheme. The fee is calculated as a percentage of the property’s value. Some lenders may opt to pass the cost of this fee on to borrowers, in the form of a higher interest rate.
Does the scheme make local property more affordable?
Research carried out by Quittance indicates that homebuyers on an average household income in Bury and Bolton meet affordability criteria to buy an average-priced property in the area.
For the research, an “average household income” assumes a property is being purchased by two people on the median annual salary in Denbighshire. Quittance used the latest HM Land Registry data to calculate the average price for homes bought in each town.
To calculate affordability, Quittance assumed 5% of the average property price would be supplied by the buyer as a deposit. A 4.5 multiple was applied to the average household income to determine if this figure was greater than the 95% of the property price required for a mortgage.
According to the most recent ONS data, the average household income for Bury is £53,488. The maximum affordable mortgage for two people with that joint income is £240,696 (£53,488 x 4.5). This is greater than a 95% mortgage required to buy an average-priced property in Bury (£207,118).
Using Bolton’s average household income of £45,848, the average property price in the city of £171,815 was also lower than the maximum affordability for local buyers.
How can you apply for the scheme?
Both first-time buyers and existing property owners are eligible for the scheme, in order to purchase a main residence for up to £600,000. The scheme is not available for new build properties, or for buy-to-let purchases.
To apply, you can approach any bank or building society offering 95% mortgages under the scheme. If you are working with a mortgage broker, they will help you find a suitable 95% mortgage.
Several big banks are using the scheme, including Santander, HSBC, Natwest and Barclays. However, not all lenders are offering 95% mortgages through the Government-backed scheme.
Nationwide, for example, has not adopted the scheme, and is instead assisting lower-income buyers by changing their affordability criteria. Several other lenders are offering 95% mortgages without the Government’s backing.
Is the scheme right for all homebuyers?
From a buyer’s perspective, it really doesn’t matter whether their 95% mortgage has Government backing or not. The guarantee protects the lender’s interest only, and is intended to encourage lenders to offer mortgages to buyer’s with smaller deposits.
Even though lenders must pay a fee to the Government for the guarantee, lenders may opt to absorb the cost of this to keep their mortgage rates competitive.
Banks are always changing their mortgage products and rates, and you may find that when you come to apply, a Government-backed mortgage is the best option for you. Be prepared to shop around, and consider other options too, such as the Government’s Help to Buy scheme for first-time buyers.
