The options for first-time buyers opened up this week as high street banks launched a wave of government-backed mortgages for those with a deposit of only 5 per cent and Nationwide announced a deal that allows first-time buyers to borrow up to 5.5 times their income.
In the March Budget, chancellor Rishi Sunak announced a scheme to help buyers secure a home purchase with a 95 per cent loan-to-value mortgage, pledging that the government would stand behind participating lenders for the portion of the loan over 80 per cent in the event of a default.
Higher-LTV deals virtually disappeared during the pandemic as lenders feared the impact of the economic downturn on earnings and house prices.
Though the government scheme has triggered the relaunch of higher-risk mortgages across the market, rising house prices have sparked concerns that fewer people will be able to afford them. On Wednesday, the Office for National Statistics said annual house price growth rose to 8.6 per cent in February, the highest rate for six years.
What deals are on offer for the 95 per cent mortgage guarantee scheme?
As of this week there are just over 40 deals available on the scheme. HSBC, Santander, Barclays, Lloyds, Halifax, Bank of Scotland and NatWest — high street lenders accounting for well over half of the UK mortgage market — are among the lenders participating, with Virgin Money expected to join in a few months.
The mortgages are available on properties worth up to £600,000, and home movers as well as first-time buyers can apply. Second-home and buy-to-let purchasers — as well as lending on new-build homes — will not qualify.
The rates are significantly more expensive than lower-LTV deals, with fixed rates for five-year deals at around 4 per cent. Defaqto, the financial information provider, said the “best buy” among the guarantee products was a 3.9 per cent two-year fixed rate from NatWest, with no product fee. The best five-year fix was outside the scheme, it said, pointing to a 3.89 per cent rate from Coventry Building Society with a £999 fee.
Santander is the only lender to offer a three-year fixed rate deal under the scheme, with a 3.99 per cent interest rate and no fee.
Will borrowers be able to afford the high rates on these deals?
For borrowers, there is no practical difference between a 95 per cent mortgage that sits inside or outside the scheme, but the stimulus effect of the policy is already showing up in the greater availability of higher LTV deals across the market.
Moneysupermarket, the comparison site, said it had seen a 71 per cent rise in inquiries for first-time buyer 95 per cent mortgages in the seven days to Monday.
Andrew Montlake, managing director of mortgage broker Coreco, said the mortgage guarantee scheme would give a boost to the market through the year. “Even when the stamp duty holiday finally comes to an end, we expect the mortgage guarantee scheme to continue to support demand among first-time buyers, which will ripple up through the market and maintain a certain level of transactions,” he said.
However, while the 95 per cent scheme opened the door for those with small deposits, many borrowers would still fail to meet the affordability requirements imposed by lenders on such deals — inside or outside the scheme.
Aneisha Beveridge, research director at estate agent Hamptons International, estimated that just 50 per cent of first-time buyers in Great Britain would meet the household income level required to service a mortgage in the scheme at a sample interest rate of 4.04 per cent for a five-year deal. In London, that fell to 20 per cent.
Affordability improves dramatically at lower LTVs. At an LTV of 80 per cent, using a sample interest rate of 2.09 per cent, 75 per cent of first-time buyers would meet the requirement, Beveridge said.
This meant Help to Buy, the government’s equity loan scheme, remained a more feasible option for many first-time buyers, she said. “Buyers with a 5 per cent deposit can access a 5-year fixed rate of 2.29 per cent (currently through Skipton Building Society). This means 70 per cent of first-time buyers would meet the income requirement of £34,000 a year.”
What about deals from lenders who have not signed up to the scheme?
Lenders such as Bank of Ireland, Accord — the arm of the Yorkshire Building Society that works through brokers — and Leeds Building Society, are offering 95 per cent deals outside the scheme. Leeds this week announced two new two-year fixed-rate deals at 95 per cent LTV, one at 3.8 per cent with a £499 product fee and a fee-free alternative at 3.95 per cent.
Other lenders are taking a different approach: Nationwide is not yet offering a 95 per cent deal but said its so-called “Helping Hand” deal, launched this week, would raise borrowers’ affordability by as much as 20 per cent.
How does the Nationwide deal work?
From next week the building society will offer a 90 per cent LTV mortgage for first-time buyers seeking to borrow up to 5.5 times their income, up from the standard 4.5 times maximum normally available.
Henry Jordan, Nationwide director of mortgages, said the lender had set aside £1bn for the new mortgages. “We think we can make best use of that £1bn to give enhanced support to first-time buyers who are probably in most need of [it] to get on to the ladder.”
The Nationwide deal is offered as a fixed rate for 5 or 10 years and is available to sole applicants with a minimum income of £31,000 or £50,000 for joint applicants. Its five-year fixed rates start at 3.34 per cent with £500 cashback and free valuation.