What will the 95% mortgage guarantee mean for the property market and First-Time Buyers?

In the budget earlier this month, the chancellor announced a guarantee to lenders offering mortgages to homebuyers with just a 5% deposit requirement up to £600,000. Simultaneously, the housing market surpassed all expectations last year with record growth in house prices and mortgage approvals at the highest levels since 2007. One of the victims of the pandemic was 95% Loan to Value (LTV) mortgages.

According to AmTrust's Mortgage LTV Tracker, 95% LTV dropped from 391 at the start of March 2020 to just 16 by September 2020. This, according to Halifax, led to First-Time buyers requiring an extra £10,000 to get onto the property ladder compared with 2019. However, it is important to stress that this was not entirely down to the withdrawal of 95% LTV mortgages and partly related to the increase in house prices by 7.6% last year.

The Sunday Times described the news of the 95% mortgage guarantee scheme by the government as the "end of worst mortgage drought on record for first-time buyers." So, what does this mean for the property market?

A sales boom? 

This is not a new scheme. A similar scheme was introduced in 2013, known as the Help to Buy mortgage guarantee. In 2013 this boosted the number of purchases by those with less than 10% deposit from 61 a day to 289 a day by the time the scheme ended in 2016.

The initial good news about introducing the 95% LTV mortgages is that the initial barrier to securing a mortgage will now be lower than it previously was. However, according to research led by estate agents, Barrows and Foresters state that the "latest scheme could have a potentially detrimental effect, resulting in house prices climbing further making them out of reach of homebuyers."  

Will 95% LTV be cheaper? 

Under guarantee, the government will underwrite 20% of any home loan offered at 95% LTV, which should lead banks to offer rates to those buying under this scheme to make available rates available to 75% LTV mortgages. At the moment, you can get a two-year fixed rate of 4.14% if you have a 5% deposit, while if you have a 25% deposit, then you can fix a two-year rate at 1.54%. However, rates as low as 75% LTV are unlikely as the government will charge banks an undetermined amount to use the government guarantee. But according to an analyst for the Sunday Times, they suggest that the rates could be as low as 3%. 

Suppose banks do drop the rates for 95% guarantee mortgages. In that case, the increase in house prices could have a lower impact on affordability as the repayments will be substantially cheaper if the average difference is greater than 1.5%. If typical £210,000 property assuming paid 1.75% interest rate instead of 4.07%, then the monthly payments would fall from £880 to £715 on a 25-year term.

Average 5% deposit requirement by region:  

95% mortgage guarantee – Good or Bad? The re-introduction of the 95% mortgage guarantee is necessary to help those being priced out of the market by the withdrawal of 95% LTV deals by major banks. The danger here is that this could further over…

95% mortgage guarantee – Good or Bad? 

The re-introduction of the 95% mortgage guarantee is necessary to help those being priced out of the market by the withdrawal of 95% LTV deals by major banks. The danger here is that this could further overheat the property market, meaning that it could hinder those the most it was meant to help.

However, this could be countered by a reduction in interest rates based on the government's guarantee. Or else, as Anthony Codling, the founder of Twinding, a property data website, put it, "if the mortgage guarantee doesn't lead to a significant reduction in mortgage rates for those with low deposits, it won't be worth the paper it's written on."