The announcement by the Chancellor, in the March budget, of a mortgage guarantee scheme was the catalyst lenders needed to start focusing again on the low deposit lending market.
What is the Government’s mortgage guarantee scheme?
Which lenders will offer mortgages under the scheme?
Who is eligible to apply for the government back scheme?
Why are some lenders choosing to offer 95% LTV mortgages outside the government back scheme?
Under the government scheme lenders are required to offer 95% mortgages within set criteria. Where lenders prefer to set their own parameters they must do so outside the scheme. A number of lenders (outside the scheme) have already launched their offering with their own criteria such as:
- 95% LTV mortgages only available to first time buyers;
- certain properties to be excluded such as new builds, flats; and
- restricting LTI limits or the actual loan amount (thereby restricting the property value to below £600,000)
What are the risks of 95% LTV mortgages?
It’s important that you fully understand the potential risks of a high LTV mortgage:
- If your property drops in value the size of your mortgage could be higher than the value of your property i.e negative equity.
- Generally the higher the LTV the higher the rate of interest you’ll pay on your mortgage.
- Currently 95% LTV lenders are only offering 5 year fixed interest rate products on a fully repayment basis, therefore your monthly payments are likely to be higher compared to interest only mortgage products.
- Committing to a 5 year fixed initial term mortgage means that If your circumstances change during that time and you need to repay the mortgage there are likely to be significant early repayment charges (“ERCs”).
Detailed below are the 5 year fixed rate mortgage options for a home purchase of value £500,000 at 95% and 90% LTVs from the same lender:
|Loan to value||95%||90%|
|5-year fixed interest rate||3.99%||3.29%|
|Lender arrangement fee||£995||£1,500|
|ERCs||5% to 1%||3% to 0.75%|
|Information correct as at 15 April 2021|
This lender will also offer a 2-year fixed rate mortgage option for a 90% LTV mortgage at 2.99% and £1,500 lender arrangement fee.
What alternatives are there to the mortgage guarantee scheme?
There are some other options that can help you buy a home with a small deposit:
- The Help to Buy scheme offers between 5% and 20% equity loan (40% in London) from the government on new-build properties in England. From April, it will be limited to first-time buyers and regional price caps will limit the cost of homes sold under the scheme
- The Shared Ownership Scheme could offer you a route on to the ladder. These schemes involve purchasing a stake of as little as 25% of a property and paying ‘rent’ on the remainder. You will have the option to buy the remainder of the property at a later date
- Some lenders currently offer a range of guarantor mortgages, which allow a parent or family member to help you buy a home. Guarantor mortgages usually involve the family member using their home or savings as collateral in case you default on your mortgage, but innovative products such as 'joint borrower sole proprietor' mortgages could be an alternative for some.
The emergence of low deposit mortgages is welcome relief for borrowers as their mortgage options will broaden. Over time as more lenders enter this market, competition may drive down the interest charged. For borrowers it’s vital that they understand all the options available and select the mortgage that meets their financial circumstances.
*The views expressed are the author’s and not ICAEW
If you are currently looking for a residential mortgage or to refinance your existing mortgage and would like to discuss your personal position please contact the Kinnison team on our website or directly at our email address.
Your home or property may be repossessed if you do not keep up repayments on a mortgage or any debt secured upon it.
Through our partnership with the ICAEW we have a dedicated mortgage advisory service for ICAEW members, through Kinnison Limited, offering our bespoke service at a significantly discounted fee structure.
For mortgages below £750,000 our typical fee is £498 (£199 payable on application and £299 on completion). For more complex cases and mortgages above £750,000 our typical fee is up to 0.6% of the mortgage amount. Of this, 20% is payable when you receive your mortgage offer and the balance of 80% on completion. For example on a mortgage application of £800,000 the fee would be £4,800 in total. Of this, £960 (20%) would be payable on issuance of your mortgage offer and the balance of £3,840 (80%) on completion. The total fee is non refundable. We may also be paid commission from the lender.
These fees apply to mortgages regulated by the Financial Conduct Authority. The Financial Conduct Authority does not regulate most buy-to-lets, commercial lending and some bridging finance. Fees for non-regulated mortgages will vary depending on your requirements and individual circumstances.
Kinnison Ltd. Registered office: 91 Wimpole Street, London, W1G 0EF, United Kingdom. Registered in England & Wales No: 09582749.
The information contained within this document is subject to the UK regulatory regime and is therefore targeted at consumers based in the UK. Kinnison Ltd is an appointed representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority.
Kinnison Ltd. Registered office: 91 Wimpole Street, London, W1G 0EF, United Kingdom. Registered in England & Wales No: 09582749