Are 5% deposit mortgages for first-time buyers the answer to our property crisis?
First-time buyers could buy a new home with as little as a five per cent deposit under a new Government scheme. The aim is to boost the flagging housebuilding market and help young buyers on to the ladder. How will the plan work?
What has the Government announced?
A form of mortgage indemnity programme to help buyers – not just first-timers – of new-build homes in England access mortgage funding. Both the Government and housebuilders will effectively take on some of the risk so that buyers need only a five per cent deposit to be accepted by a bank for a loan.
Mortgage lenders have been demanding at least a 15 or 20 per cent deposit. It is thought 100,000 loans could be made available in this way.
The Government is also providing £400 million to kick-start housebuilding projects at ‘ready to go’ construction sites where building work has stalled.
Why is this project necessary?
There is an acute housing shortage in Britain. The number of new homes being built is at its lowest level since the end of the Second World War.
One of the problems is a decline in available mortgage funds since the credit crisis and the inability of first-time buyers to save up a big enough deposit. The 20 per cent required by most lenders means about £33,000 based on the national average house price of £166,000.
Tatiana Raikes, 23, who rents a flat in Soho, central London, with a friend, has been saving towards her first home since she was 18. But she says it could still take another three years before she has enough to begin househunting.
Tatiana, who works in corporate communications for a London PR agency, says she would use the Government’s indemnity scheme if she could find a participating development close to the capital.
‘I’d be very happy to buy a newbuild property as long as my commute was no longer than one hour,’ she says. ‘My worry is there won’t be enough funding and I could miss out. I think that the deals under the indemnity scheme will be limited.’
How will the scheme work?
Banks will lend 95 per cent of the property value while the developer will provide up to 3.5 per cent into a centralised ring-fenced fund. This fund will run for seven years. If after that time there has been no default on the loan, the developer can take back its cash. If the property is repossessed and sold at a loss, the lender can reclaim up to 95 per cent of its losses from the ring-fenced fund. If the housebuilder’s fund can’t pay, the lender can claim from the Government.
What sort of mortgage rate will borrowers be offered?
At present, only a handful of lenders will lend up to 95 per cent. They include Yorkshire and Clydesdale banks as well as Cambridge, Mansfield, Melton Mowbray, Saffron, Skipton and Shepshed building societies. But the rates are high.
Yorkshire Bank has a three-year fixed rate at 6.19 per cent while Skipton’s two-year fix is set at 5.99 per cent. Many of these deals have restrictions and might not lend on new-build property or on flats in high-rise blocks.
The six biggest lenders, including Halifax, Santander and Nationwide Building Society, have all agreed to take part in the mortgage indemnity scheme. This should increase competition and mean interest rates coming down.
However, borrowers should expect to pay upwards of 5.5 per cent. Nationwide offers a 95 per cent mortgage to existing customers under its Save to Buy scheme.
Customers must save at least £50 a month for six months with the society before applying for a loan. It offers a 6.14 per cent three-year fixed-rate with a £900 fee. Rates under the indemnity scheme will probably start at a similar level.
What are the risks for buyers?
New-build homes have suffered badly in the downturn, with average prices dropping 15 per cent since 2007. Buyers could find their hardsaved deposit is soon lost and that they are sitting on negative equity if the housing market takes a further turn for the worse.
Ben Thompson at broker Legal and General Mortgage Club says this could prove a stumbling block. ‘Although buyers won’t require a large deposit, they will still have to feel confident to commit to the purchase,’ he says. ‘Unless house prices have a period of growth, there is no urgency to jump in.’ 
What are the alternatives for cash-strapped buyers?
As well as current 95 per cent mortgage deals, there are parental guarantor schemes for those with little or no deposit and for new-build or older properties.
Specialist bank Aldermore offers a 100 per cent loan-tovalue deal if a parent, step-parent or grandparent guarantees 25 per cent of the property value. Bath and National Counties building societies offer similar schemes up to 95 per cent. Lloyds’ Lend a Hand scheme lends up to 95 per cent but a guarantor must put at least a further 20 per cent of the property value in a savings account as indemnity.
Source:http://www.thisismoney.co.uk/money/mortgageshome/article-2066576/Are-5-deposit-mortgages-answer-time-buyer-crisis.html by Jo Thornhill
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