How Will This Be Achieved?
“Fix our broken housing market” is what Boris Johnson announced to the virtual Tory party conference on October 6th. A proposed scheme that enables first-time buyers to get a mortgage with only a 5% deposit. Encouraging young people to move from “Generation Rent” to “Generation Buy”, the PM hopes that the plan will create two million new homeowners, however very few details were revealed about how these long-term, fixed-rate mortgages might work.
What deposit do first-time buyers typically need?
Prior to the Covid-19 pandemic in the UK, it was possible for first-time buyers to buy a home with as little as a five per cent deposit, however virtually all these offers have been withdrawn.
With the withdrawal of these low deposit mortgage deals, the average deposits now tend to be around the 15% – 20% on average.
Those looking to buy their first home have also faced difficulty in getting a foothold in the property market, due to strict & rigorous affordability checks, even in instances where they could easily afford the repayments.
Currently buyers are typically only allowed to borrow around 4.5 times their annual salary, even with sufficient funds for a deposit.
How will “Generation Buy” be achieved?
Some have suggested that relaxing the “stress test” rules imposed on banks, that came into force after the financial crisis. Some experts criticised these rules for hindering lending, particularly amongst contractors & the self-employed. There is also the assumption that strict affordability rules may also be loosened.
Other’s feel that a more likely alternative will be a government backed guarantee that operates as a variant of the help-buy scheme. The help-to- buy scheme enabled buyers to buy a home with just a 5% deposit with the government fronting 15% of the purchase cost.
The Government will be required to work closely with banks on these proposals. Banks are conscious of the fact that they must lend responsibly, avoiding issues surrounding negative equity.
Will the Government build new homes in conjunction with the “Generation Buy” scheme?
Sceptics would say that “2 million new homeowners sounds wonderful in theory, but where are these people going to live? Many have argued for years that not enough homes are being built. Boris Johnson said that he aims to ‘transform the sclerotic planning system’ and make it faster and easier to build new homes.
So, the government’s approach to this issue will be both interesting & closely monitored by concerned parties.
What the experts say:
Tracy Scott | Head of Mortgage Advisory
“This 5% mortgage deposit scheme sounds exciting & could potentially really help the housing market, in particular first-time buyers looking to get on the property ladder.
I’m not sure how quickly regulation could be changed & which lenders would come out with high LTV rates when it’s extremely difficult just now to get a 90% mortgage.
Lenders cannot cope with the demand at the minute & if it does go through will be interesting to see what kind of interest rates lenders come out with & what their internal credit scoring systems would be like at this level of borrowing.
We must also look at cases such as the ‘MI New Home scheme’, which looked to overcome the deposit gap back in 2012. Launched in Scotland, this was a mortgage indemnity scheme which aimed to help up to 6,000 households gain easier access to new homes by offering 95% lending. In the end it didn’t get close to that target, with only 800 households availing of the offer. The MI New Home Scheme closed to new applicants in March 2015.
In some cases, house prices dropped & when clients came to review their mortgages in 2 years’ time, they were in a negative equity situation.
So, it will be interesting to see what the UK Government plan to do differently this time around”.
Gordon Hunter | Managing Director
“We have an extensive knowledge of mortgages involving New Build properties. There are many banana skins out there when dealing with things like builder incentives so it’s hugely important to deal with an expert that will guide you right up until you get the key in the door.
Here at Super Contractors, we will also look after you for the life of the mortgage and any future mortgages moving forward”.