95% Mortgage

The 95% mortgage conundrum

November 6th, 2017

In 2013, Help-to-Buy was released in a flurry of excitement – first-time buyers could get onto the property market with a 5% deposit and lenders were cushioned in the event of the homeowner defaulting on a mortgage.

The Help-to-Buy 95% mortgage loan-to-value guarantee scheme saw 20% of the mortgage amount underwritten by the government to encourage lenders back to the marketplace (after the FCA set strict lending criteria) by limiting their potential losses. While the later Help-to-Buy equity loan saw the government lend up to 20% of the cost of a new build home (up to 40% in all London boroughs since 1 February 2016), provided the buyer could find 5% cash deposit and a 75% mortgage – however, after five years, interest was due on the government loan and the government due its share of the equity growth or loss on its sale. The situation as it stands currently is that the mortgage guarantee scheme was discontinued in December 2016 while the equity loan scheme will continue until 2021, as confirmed by then Chancellor, George Osborne in November 2015.

This month, October 2017, Theresa May said the government will find an extra £10bn for the Help to Buy scheme to let another 135,000 people get on the property ladder. Details of this funding are due to be announced in November’s Budget.

This additional support raises some interesting questions. Why has only the Help-to-Buy equity loan continued? And why can’t the principle of an underwritten mortgage scheme be used to help first-time buyers who would like to buy a period property rather than a new build?

After all, what is the difference between a Help-to-Buy mortgage and a 95% loan-to-value (LTV) mortgage anyway? For many lenders, this is the most interesting question. Help-to-Buy was essentially a 95% mortgage that the government guaranteed (in part) that encouraged lenders to offer higher LTV ratios than they had previously. The mortgage for first-time buyers of new builds gave the property market a much needed boost.

To answer why one element of the Help-to-Buy scheme is continuing when the other hasn’t, it’s worth considering the house builders themselves. Currently 60% of new properties are built by ten companies; it stands to reason that those ten companies just can’t keep pace with demand. With the mortgage guarantee element scrapped but a continuation of the equity loan scheme, the government seems to be keen to support the developers who have already invested in future projects to increase the housing stock.

Two important things have happened since the introduction of Help-to-Buy then: one, developers have been supported to increase the much-needed housing stock and two, after seeing the reality of 95% mortgages, lenders are now feeling comfortable enough to increase the scope of the rest of their products. Proof of this is the fact that some have begun to offer mortgage products at high LTV ratios without government support and outside Help-to-Buy’s remit. These low-deposit mortgages are perfect for people who are already homeowners, perhaps young families, looking to take the next step but not able to save the finances to do so thereby helping to keep the market fluid.

Without governmental underwriting however, there are fewer products available in the 95% LTV range. The 95% mortgages are a higher risk for the lender (obviously without the government’s underwriting) and are likely to have higher interest rates. At the time of writing the comparison between the interest rates for Help-to-Buy and 95% mortgages is stark. Help-to-Buy: 1.39% (two-year fixed interest) versus a 90-95% LTV product at 3.89%.

So in much the same way as Help-to-Buy supported first-time buyers to buy a new-build, could the same principle be applied to support first-time-buyers to purchase a period property or a so-called ‘second-hand’ property? Could the government extend its underwriting support to all 95% LTV mortgages? According to Sarah Davidson in This is Money’ from January this year, the leap from 49 Help-to-Buy products in 2013 to 242 in 2017 shows that the Help-to-Buy scheme stopped lenders from seeing first-time buyers as ‘risky’ customers. In fact, since its launch, the scheme has helped more than 200,000 buyers, accounting for one in 12 of all first-time buyer transactions.

If the government could be encouraged to re-enter a mortgage guarantee scheme which included second-hand properties, as opposed to purely new-builds, then surely it would open up the housing market and give an entire swathe of the population some financial flexibility and better life choices, especially in areas of the countries where new-builds are not so prevalent.

If you would like to discuss first-time-buyer mortgages or the Help-to-Buy equity loan options that are available to you and find competitive rates, make contact with the Visionary Finance team today.