Government Backs Rollout of 5% Deposit Mortgages

The government will launch a mortgage guarantee scheme allowing 5% deposits, Chancellor Rishi Sunak confirmed in the budget speech today.

By reducing the minimum deposit required to take out a mortgage, the government hopes to lower the barrier to homeownership for first-time buyers when the mortgages become available in April.

Unlike the help-to-buy scheme, the government-backed low deposit mortgages are open to all and not restricted to new builds.

Under the scheme, lenders can buy a guarantee from the government to protect their investment in case a borrower defaults on their loan.

The protected mortgages are limited to properties worth up to £600,000 and have a five year fixed-term.

Low-deposit mortgages are often viewed as a risky product, and their availability dropped away during 2020 due to the uncertain economic outlook.

However, the decision to reintroduce them will mean that many saving for higher deposits will be able to afford the down-payment.

According to Rightmove, the average first-time buyer in England needs to save £36,284 to make a 15% deposit. In London, that figure rises to £71 635.

The financial impact of Coronavirus has disproportionately affected the under-30s and younger people, who spend a greater proportion of their income (48%) on essentials compared to older generations, according to the Office of National Statistics.

As the average first-time-buyer in the UK is 34 years old, the financial impact of the pandemic has been felt by many in 'generation rent' who could be saving a deposit on their first home.

For those with little in the way of deposit, finding a 95% LTV mortgage has been pretty much impossible in recent months. Now and again a building society has offered them, with Saffron building society launching at 95% June, but demand was such that it only lasted a matter of days.

said Mark Harris, Chief Executive of mortgage broker SFP, Private Clients.

The only other option currently to obtain a mortgage at this level is to call upon a third party, typically a parent, to provide extra security in the way of a deposit or equity within the 'guarantor' property. Not everyone is in the fortunate position to be able to do this

However, critics have pointed out that low-deposit mortgages are often risky for borrowers.

When buyers only place a small deposit on their home, they face the risk of falling into negative equity.

When house prices fall, borrowers who made low deposits may find they suddenly owe more than their home is worth- making it impossible to remortgage or sell.

Higher deposits help to avoid this because the borrower owns more of their home, creating a 'buffer' should case prices fall.

There are also concerns that the scheme could lead to a goldrush on affordable homes, driving up house prices and pricing out the very people the scheme is intended to help, in conjunction with the effects of the extension of the stamp duty holiday, also announced in today's budget.

According to the Office of Budgetary Responsibility, the ratio of house prices to average earnings is set to increase from 7.2 to 7.6 over the next year, meaning that overall, housing is expected to become more unaffordable in relation to wages over the next year.

Jonny Webb, Senior research fellow and policy expert in housing and homelessness at the Insitute for Public Policy, said:

95% LTV mortgages are nothing new, and higher value mortgages risk saddling buyers with even more debt. England's broken housing market has priced too many people across the country out of accessing a home of their own, including in the North.

In Greater Manchester, for example, house prices have increased by 35% in the past five years. Even with access to more capital, aspirational buyers simply cannot save at the required rate to buy a home.

To ensure we have enough homes that everyone can afford, the government needs to fix the root causes of England's broken housing market. This requires reform of the planning system and building more genuinely affordable homes, including social rented housing.

A number of the UK's biggest lenders, including Lloyds, Natwest, Santander, Barclays and HSBC, will start offering the 95% LTV mortgages in April, with more, including Virgin Money, to follow.