Every year, the government's chief finance minister makes a budget statement to MPs in the House of Commons and this year, Chancellor Rishi Sunak has announced changes to mortgage lending that support Boris Johnson’s plans of “ending generation rent”.
But can first-time buyers get excited about the new announcement of 5% deposit mortgages and how do they go about trying to get one after a year of an economic downturn for the UK?
The 2021 budget in a nutshell
Rishi Sunak has announced new government-backed 5% deposit mortgages in the 2021 budget.
First-time buyer mortgages with low deposit requirements have been sparse since the beginning of the Covid-19 outbreak.
The budget reveals that those buying homes worth up to £600,000 will be able to apply for loans up to the value of 95% of the property price.
Several of the countries leading lenders including Lloyds, Santander, Barclays, Natwest and HSBC will operate 95% mortgages as of next month.
“We want to turn generation rent into generation buy”.
Can first-time buyers get excited about getting on the property ladder?
The return of 95% loan-to-value mortgages for first-time buyers creates an opportunity for many to aspire to purchase a home.
Arguably, many under-40s have felt that a property purchase has been out of their reach given that many lenders had ramped up deposit requirements to a budget-stretching 15%.
Making the dream even more unattainable was the tightening of lending criteria from UK banks and lenders at the beginning of the pandemic, excluding thousands of would-be buyers who couldn’t meet the new eligibility criteria on the basis of poor affordability or bad credit.
The announcement that the government will back mortgages and shoulder some of the risks associated with higher LTV mortgages could help to provide confidence for lenders.
It’s hoped that as a result of the Chancellor’s budget announcement, lenders will increase their availability for low deposit mortgages, though some predict that such loans will likely come with an inflated interest rate.
How will 5% deposit mortgages work?
The government will offer guarantees to lenders, bringing back 95% mortgages to first-time buyers and those purchasing property up to the value of £600,000.
The new scheme will launch in April 2021 and is set to reinvigorate the market for high loan-to-value lending, just as the Help to Buy mortgage guarantee scheme did after the 2008 financial crisis.
The 5% deposit scheme coincides with the extension of the Stamp Duty holiday in England and Northern Ireland as well as the renewed Help to Buy scheme.
Who will be able to get a 5% mortgage?
Lenders will each have their own criteria, so even if you’ve been rejected for a mortgage in the past, there could be a handful of lenders that may be open to approving a mortgage in 2021, especially if your own financial circumstances have improved.
A person’s eligibility for a mortgage will be heavily dependent on their affordability, which is why most lenders look at the following when assessing a mortgage application:
Annual gross income
Expenditure
Debt-to-income ratio
Deposit size
Job type
Credit history
The type of property you want to buy
How do lenders check eligibility for a 95% LTV mortgage?
The prospect of mortgage providers lending large loans is a possible one but bear in mind that the larger the loan, the more loss a lender faces if the borrower defaults on their repayments.
Most banks and lenders will only lend 95% loan-to-value mortgages to applicants with an impeccable credit score and a regular income, irrespective of any government guarantee.
Can borrowers with low incomes get 5% deposit mortgages?
A lower income can result in a reduced choice of lenders but that’s not to say that getting a mortgage on a low income is impossible, especially with the right advice.
Joint mortgages can allow borrowers to apply for larger loans as lenders can combine incomes to calculate the maximum amount of loan they will approve.
To determine whether or not a mortgage applicant(s) can afford the amount of money they would like to borrow, most lenders use income multiples between 4.5 - 5.5 x an annual income.
During the first quarter of 2021, the majority of mortgage lenders have provided loans of 4.5 x a gross salary, subject to the borrower meeting other eligibility criteria. Income multiples of higher than 4.5 tend to be offered to borrowers with high affordability and a predictable income.
A yearly salary of £20,000 could equate to a loan of £90,000 when multiplied by 4.5, whereas a combined income of two applicants who each earned £20,000, could result in a mortgage of £180,000.
Can self-employed workers get a 95% government-backed mortgage in 2021?
As mentioned, the predictability of an applicant’s income will also weigh heavily in the decision of how much they can borrow, if at all with some lenders.
Being self-employed can again reduce the choice of lenders available, and some charge higher rates of interest too, depending on the individual’s circumstances.
Our brokers have access to a network of lenders, with a variety of deposit requirements and a plethora of borrowing options.
Mortgage advice for self-employed workers post-covid
It’s a mortgage broker’s job to unearth the most competitive lenders and present borrowers with the most suitable and affordable route, always explaining the pros and cons and highlighting opportunities to save money.
Getting the right advice about applying for a 95% mortgage can be the difference between an approval and rejection whether you’re self-employed or not, and a mortgage broker can take the time to look at your unique circumstances and advise you on the most suitable route for borrowing, whether that be a mortgage or a secured loan.
For tips on how to get a mortgage if you’re self-employed, including how to avoid credit rejections in the run-up to an application, read our self-employed mortgage guide.
Can I get a 5% mortgage if I’ve been furloughed?
Statista report that the cumulative number of jobs furloughed under the job retention scheme in the UK as of February 15, 2021, was 11.2 million. The predictability of income was shaken for many who were left and remain left, wondering when they will return to work.
The furlough scheme has been extended until the end of September 2021 and if lending criteria doesn’t improve, many could remain excluded from the mortgage market.
In fact, in some cases, if an applicant has taken financial support from the government or been put on the furlough scheme, lenders have viewed their furlough mortgage application with caution and some have immediately declined.
Research Director at Zoopla, Richard Donnell comments that “The Bank of England which regulates the mortgage market, may need to look at the rules it sets for affordability tests.”
Doing so could help thousands of first-time buyers who would have previously met eligibility criteria. Fortunately, there may be lenders willing to accept furloughed borrowers under certain circumstances.
Is it a good idea for a furloughed worker to apply for a 5% mortgage?
That being said, a 5% deposit mortgage could be a high-risk loan for a furloughed borrower without a predicted return-to-work date and lenders may want to see written confirmation from an employer that employment will continue, in the form of an employment contract.
Furloughed workers that are due to return to work soon may find it easier to find a willing lender, though it’s important that any borrower checks their eligibility for a mortgage product with an expert before applying to avoid a credit rejection.
Is it only first-time buyers that can get the new 5% deposit mortgages?
No, the new 5% mortgage deposit scheme is open to all buyers depending on their chosen lender’s eligibility checks.
Those who are already homeowners may have built-up equity in their current property however, there are instances that call for 5% deposit remortgages including using the money for renovations.
Porting a mortgage with a small deposit may be possible in 2021 but always check your current agreement for any fees associated with transferring your deal, as the cost could outweigh the benefits and in which case, it may be more advantageous to switch to a new lender altogether.
Are the new 5% deposit mortgages for New Builds only?
It is understood that any property under the value of £600,000 will be eligible for the scheme - not just new builds, as is the case with Help to Buy.
New data from Rightmove has found that 86 per cent of properties currently on the market fit into this price bracket.
How much would a 5% deposit be for a house in the UK?
Government data shows on average, house prices have risen by 1.5% since November 2020. The annual price rise of 8.5% takes the average property value to £269,150.
Here’s how a 5% deposit could vary between the UK regions based on the average property prices in December 2020:
UK regions | Average property price December 2020 | 5% deposit |
South East | £341,007 | £17,050.35 |
South West | £282,388 | £14,119.4 |
East Midlands | £215,046 | £10,752.3 |
East of England | £310,912 | £15,545.6 |
London | £496,066 | £24,803.3 |
North East | £141,154 | £7,057.7 |
North West | £183,727 | £9,186.35 |
West Midlands | £216,950 | £10,847.5 |
Yorkshire | £182,907 | £9,145.35 |
Is getting a 5% mortgage a risky move?
Applying for a mortgage with a 5% deposit can be an affordable solution for many buyers who simply don’t have a larger deposit but do meet the affordability criteria that many lenders require.
Borrowing 95% of a property's market value leaves borrowers exposed to a risk of loss though, as if house prices fall, they could end up owing more money than their house is worth.
That means that even if they wanted to sell the property in the event that they could no longer afford the repayments, the proceeds wouldn’t cover the balance of the loan. This is what’s known as negative equity.
Having a larger deposit means owning a larger proportion of the property upfront and reduces the risk of falling into negative equity but understandably, it’s not always possible.
Will interest rates rise in 2021?
Rishi Sunak’s budget announced that while the country's prospects are now stronger, Coronavirus is still doing profound damage to the economy.
“Today’s forecast makes clear that repairing the damage will take time. Because of Coronavirus, our economy will be 3% smaller than it previously was.
However, the OBR forecast that our economy will grow this year by 4%, by 7.3% in 2022, then 1.7%, 1.6% and 1.7% in the last three years of the forecast.
The amount we have borrowed is at the height of what we borrowed in WW2. It would be irresponsible to withdraw support too soon but we need the fiscal freedom to act when the next crisis comes, the freedom you only have if you start with public finances in a good place.
Interest rates cannot stay low forever.”
Will 5% deposit mortgages help end generation rent?
Some property experts predict that 5% mortgages will cause a hike in demand for first-time buyer properties which subsequently, could inflate property prices.
As reported by The Telegraph, Anneliese Dodds, the Shadow Chancellor, has warned that a government scheme will help a "tiny proportion of Generation Rent" while fuelling the housing crisis by making properties more expensive.”
This projection is hardly ideal for the many first-time buyers eagerly awaiting to be able to afford to buy.
Our advice?
Contact a broker who can look at the combined factors that could affect your eligibility and how much you pay for your mortgage overall.
They’ll look at the obvious factors like interest rates but they’ll also carefully consider lender incentives, new-build incentives and early exit or repayment fees too.
