Real Estate

Biggest UK banks sign up to low-deposit mortgage guarantee scheme

The UK’s five largest banks have agreed to support a new government scheme that aims to help first-time home buyers by offering mortgages to those with small deposits.

Lloyds Banking Group, NatWest, Santander, HSBC and Barclays will from next month lend up to 95 per cent of a property’s value, in a move that chancellor Rishi Sunak said would address “a significant barrier to people getting on the housing ladder”.

Banks scaled back low-deposit lending when the coronavirus hit, fearing an economic downturn and drops in house prices could lead to an increase in defaults or leave borrowers trapped in negative equity. Barclays is the only big bank that currently lends to borrowers with 5 per cent deposits.

The government will encourage lending under the low-deposit scheme, confirmed by Sunak in the Budget on Wednesday, by offering a guarantee that will partially protect banks from potential losses.

Mortgage experts said the initiative had the potential to help some first-time buyers, particularly outside London and south-east England, but said the scale of the impact would depend on how the banks follow through on their commitments.

Lloyd Cochrane, NatWest head of mortgages, said it would “help segments of the market for whom home ownership has felt far out of reach in recent months”. But both NatWest and Lloyds said it was too early to give details on potential lending quotas or interest rates. 

Hina Budhia, partner at Knight Frank Finance, the mortgage broker, said: “It is all well and good [banks] saying they will join . . . but the question is how attractive is it going to be for a purchaser? Are they better off just trying to get assistance from family or waiting to get a higher deposit?”

On average, borrowers with a 5 per cent deposit are charged more than a third more than borrowers with a 15 per cent deposit, according to Bank of England data. The average interest rate on a 95 per cent loan-to-value mortgage reached its highest level in five years in November, and has only dipped slightly since.

Many bankers reacted with caution when prime minister Boris Johnson announced plans for a mortgage guarantee scheme in October ahead of the Conservative party conference, stressing the need for strict affordability checks.

Critics also said the policy would prop up demand without addressing a longstanding lack of supply in the UK housing market. Keir Starmer, Labour party leader, compared it with a previous guarantee scheme that he said “fuelled a housing bubble . . . pushed up prices and made owning a home more difficult.”

Regulatory restrictions will also limit the total number of buyers who will be able to take advantage of the scheme. Banks are only allowed to make a limited number of loans that are worth more than 4.5 times the borrower’s annual income, with some lenders such as Barclays already close to the maximum.

Richard Donnell, research director at Zoopla, said that, as a result, “the scheme will have less impact for buyers in southern England where high house prices are a major barrier.”

Although the scheme is primarily designed to help first-time buyers, it will also be available to existing homeowners. It can apply to purchases worth up to £600,000, and will be available until the end of 2022.

Sunak said other lenders including Virgin Money would join the initiative “shortly after” next month’s launch. Specialist mortgage lenders such as Vida, which caters to people such as the self-employed who can struggle to borrow from high street banks, also said they planned to develop products that would work with the scheme.


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