Chancellor George Osborne gave the mortgage market a welcomed boost last month when he announced a package of measures aimed at helping borrowers with a small deposit to get on the housing ladder.
In his annual Budget announcement, Osborne unveiled the Help to Buy scheme now available directly through banks and mortgage brokers such as Capital Fortune.
The first element of the scheme is what is known as a mortgage indemnity guarantee. This means the Government will guarantee part of a loan should the borrower default.
Under this part of the scheme, the Government has pledged to guarantee up to 15 per cent of the purchase price of transactions up to £600,000 that take place under the scheme, with the borrower having to put down as little as a 5 per cent deposit. It expects to provide guarantees on up to £130bn of mortgage loans at higher loan-to-values, providing a much needed boost for this part of the market.
The idea behind this kind of guarantee is lenders will be more willing to lend to those with a small deposit if the Government will shoulder some of the losses if a borrower defaults.
The second part of the scheme is an extension of the Government’s shared equity scheme FirstBuy. From April, the Government will provide an extra £3.5bn towards shared equity loans in a bid to help 74,000 more homebuyers get on the housing ladder.
Borrowers must have a 5 per cent deposit and will be able to secure 20 per cent of the property price as a loan from the Government to purchase a new-build home. The loan is interest free and will be repaid when the house is sold.
Since 2007, when the financial crisis began to bite, lenders have shied away from lending at higher LTVs, instead favouring those with large deposits, as they are seen as less risky.
This scheme could change all of that, as long as mortgage lenders embrace both elements of the scheme.
Moreover, if the Financial Conduct Authority, the new name for the City regulator, gives lenders allowances on capital relief – the amount of money they have to set aside for each loan to guard against a default – then rates could tumble and banks and building societies could do greater volumes of this type of lending. At the moment, lenders have to hold much for money aside as a safety net at 90 per cent LTV than they do at, say, 60 per cent LTV.
But, as we have seen with NewBuy, the Government’s first attempt at a mortgage indemnity scheme which was solely for use on new-build homes, rates will fall a little at higher LTVs.
Therefore it is fairly likely that credit conditions for those with a small deposit will improve over the coming three years, while the scheme is in place.
While mortgage rates are at an all-time low, on average, the biggest cuts in recent months has come for those with at least a 30 per cent deposit.
If the Help to Buy has the desired effect, then there is a chance we could see some of the best UK mortgage deals at 90 per cent LTV and over since the financial crisis.
But with these types of schemes there is always a warning. Borrowers who can afford to take out a 95 per cent or 90 per cent LTV loan now should do so and should not rely on Government help. Take the shared equity loan element of NewBuy – while this is an interest-free loan for five years, you still have to pay the money back and if you do not sell your home within 5 years, you will get charged interest on your mortgage and a separate amount of interest on the loan provided by the Government.
To ensure you are making the right choices, it is best to speak to an independent mortgage broker, who will be able to help you decide which route is best for you.