During the 2021 Budget reveal, Chancellor Rishi Sunak announced that, as of April, the 95% mortgage scheme will be in effect. Simply put, this type of mortgage allows buyers to borrow up to 95% of the purchase price on a property in the form of a loan, with the remaining 5% used as a deposit.
The scheme was introduced by the government in order to help both first-time buyers and previous homeowners with fewer savings in getting on the current property ladder, as well as relieve pressure off of prospective buyers during the coronavirus pandemic: a significant number of the British population have been put onto furlough or found themselves unemployed due to COVID, making it more difficult to get onto the property ladder.
When choosing a 95% mortgage scheme, you also may be entitled to the option of additional payments and overpayments, as well as being able to borrow for up to a 35-year period.
Former Chancellor George Osborne, who was responsible for the 2013 UK Budget, created the Help to Buy scheme with the intention of helping buyers to obtain a mortgage during what was a slow decline in homeownership. There were two types of mortgages offered under this scheme: equity loans and shared ownership.
An equity loan included a percentage of the buyer’s property held by the government: if you were to sell that property, then the government would be entitled to a 20% cut of the selling price. Shared ownership, exclusive to first-time buyers and previous homeowners, was there to aid people who were financially struggling and unable to pay off their mortgage all at once. Under this scheme, buyers were given the opportunity to pay a percentage of 25-75% of the mortgage and then pay off the rest as rent.
The issue with the Help to Buy scheme, however, was that the accessibility that it offered to first-time buyers factored into the rise of property prices (evident by the 1.4% increase in house prices that Shelter recorded in 2013, not long after the scheme was introduced). The 95% mortgage scheme, although similar in breaking up prices into percentages, is arguably an improvement on the scheme in that it stands to be far more beneficial to first-time buyers, and the percentage is a fixed integer.
The Help to Buy scheme will be updated and stay in effect until 2023 (according to data recorded in July 2020) but it can be argued that Help to Buy will become obsolete with the introduction of the 95% scheme set to start in April 2021, as it has a higher potential of reaching more people.
In March 2021, Rishi Sunak released his plan for the upcoming financial year, which included his wish to see “Generation Rent” (alluding to Millenial and Gen-Z first-time property buyers) transition into “Generation Buy”. By extending the 5% scheme deadline by a further six months, Sunak is ensuring that there are more opportunities for people to apply for mortgages and get onto the property ladder.
As for mortgage providers, they have now been given the green light to offer 95% mortgages, as Sunak also announced in the Budget that the government will pledge to back any 95% mortgages given to first-time property buyers or previous homeowners: these mortgage lenders include HSBC, Nationwide, Virgin and Barclays, to name a few. These schemes are set to launch from April 2021, extending the net to a broad range of buyers.
According to Which, buyers are able to borrow up to “five times” their salary under the 95% scheme, calculated by online services that compare your claim against your credit score, affordability and annual income. Not all mortgage providers have the same financial cap but it is understood that the average provider in Britain has a general loan limit of £600,000.
As it currently stands, the economy has prevented a lot of property buyers (especially first-time buyers within the younger generations) from entering the property market. The 95% scheme will allow those buyers to have a broader range of mortgages with lower interest rates but buyers stand to struggle financially if they’re also paying for rent on a current property on top of saving for the 5% deposit.
Supporting the concept of Generation Buy, the government will be removing the obstacle of a smaller deposit void that has prevented a substantial amount of first-time buyers from entering the property market; 23% of prospective buyers have had their loan value reduced by their mortgage providers within the last year.
As the 95% mortgage scheme is not exclusive to first-time buyers (in the way that Help to Buy is), the target audience includes all prospective buyers looking to buy a property as soon as possible.
Because Britain’s economy is still in the process of recovering from the impact of the coronavirus pandemic, a substantial amount of prospective buyers are trying to be as conservative as feasibly possible with their money: the 95% scheme, in that sense, is ideal because it allows those with a limited budget to put down a deposit and get on the property ladder faster.
There’s always been a demand for housing, but one could argue that, due to the effects of the pandemic, that need has significantly increased. The combination of this, and the current imbalance of demand and supply on the UK property market, have resulted in the introduction of the 95% mortgage scheme.
When the coronavirus outbreak picked up momentum in 2020, a large number of first-time buyers were negatively affected. In the second half of the year, Rob Houghton (CEO of Reallymoving) stated that there was a decrease of 12% in first-time buyers, as previous homeowners were more likely to reap the benefits of the stamp duty holiday.
However, the reintroduction of the 95% mortgages will benefit first-time buyers in a number of ways: with house prices set to rise in 2021, many first-time buyers consider it to be imperative to purchase a home as soon as possible. By using the 95% scheme, they will be able to bypass the need to save up for a significantly large deposit and get on the property ladder a lot faster.
One of the other concerns following fast-rising property prices is that the Millennial and Gen-Z generations are expected to play a pivotal role in the growth of the UK’s property market, yet will be hindered by the fact that they won’t have existing home equity to fall back on for down payments. As of January 2021, 6 million British people were recorded as being on Universal Credit: this is an increase from 2.8 million that were recorded only 12 months earlier.
However, now that 95% mortgages have been introduced (alongside both the furlough and stamp duty holiday extensions), the blockade for the younger generations of buyers will be at least temporarily removed.
Mortgage providers found themselves dealing with more and more first time buyers that were furloughed in 2020. Prior to the 2021 Budget, mortgage providers (such as Virgin and HSBC) were unwilling to offer 95% mortgages to those who were furloughed despite solid proof of employment. This is due to the fact that most mortgage providers tend not to consider people that do not have a regular income, whether they have help from the government or not.
Prospective buyers who are currently furloughed will find that the 95% mortgage scheme will vary from provider to provider, as mortgage lenders can take your furloughed income into consideration but are likely to be more flexible if you can provide a letter from your employer that either states that you’re receiving more than the permitted 80% minimum of your wage or that you have a set date for returning to work. However, there are plenty of other mortgage options available to both furloughed and low-income earners in general.
The coronavirus pandemic has taken a huge toll on Britain’s economy, and whilst the OBR project that we are likely to recover by mid-2022, the UK in its entirety has been struggling over the last 12 months. The government made the decision to borrow and divide up more money in order to provide job protection and security for the British population, however, that money will consequently need to be made back through tighter financial restrictions with regards to public spending and a tax rise in late 2021.
An upside to this situation is that, despite national restrictions enforced by the PM Boris Johnson, property agents have still been allowed to conduct in-person viewings with potential buyers, with the option of virtual viewings in a lot of cases for those unable to travel/cross county borders. In addition to the 95% mortgage extension (valid until September 2021), this means that first-time buyers have the breathing room to synchronise with their chosen mortgage lender and broker to finalise any sales made from January 2021 or any period from last year.
Michael El-Kassir (managing director of GRE Assets) has commented that, as a consequence of the lockdown measures (due to the pandemic) and the lower interest rates, the Help to Buy scheme, the 95% mortgage scheme and the stamp duty holiday extension, prospective buyers have had a “wake-up call”, with many now re-evaluating what they want in a new property.
Distinction Wealth, one of London’s top property investment companies, states that “moving forward, the Government’s introduction and extension of the stamp duty holiday and the reintroduction of the 95% mortgage scheme is set to aid significantly in boosting activity in the property market, painting a bright post-pandemic future for investors.”
“The fiscal stimulus package agreed by Treasury over the last year had been a substantial investment in the UK economy – and it has kept the construction sector alive. We’re seeing no slowdown in planning applications whatsoever – especially in our market hotspots. Our clients are still seeking housing consents, while the market is buoyed by the stamp duty holiday. There is still considerable value to be had in sites suitable for residential planning permission.” Ben Norton, Planning Consultant, Norton Taylor Nunn.
The short answer? Yes.
During such uncertain times, especially in the world of finance, the 95% mortgage scheme provides a foot in the door for first-time buyers that is not only beneficial but likely to stand the test of time: the demand for housing in the property market has been projected to increase in 2021, so if there’s a property you have your heart set on, it’s better to act now than wait to save for a larger deposit (otherwise you’re battling the rate in which you can save money with the rate in which property values are increasing).
Martin Bright, director of FFM, has said: “We can’t wait to resume helping first-time buyers with small deposits! Fees Free Mortgages specialise in helping first-time buyers and we welcome the Government’s decision to back mortgages for first-time buyers.
FTB’s love using Fees Free Mortgages as we can help with much more than just the mortgage. Our advisers can help in finding a solicitor, arrange Buildings and Contents insurance and protect your mortgage with life insurance.”
At Fees Free Mortgages, we can help first-time buyers seeking to apply for a 95% mortgage (or a low deposit option in general) and work with you to find the best choice that matches your needs: our experts aren’t paid commission based on the size of your loan or choice of lender, so their incentive is purely based on getting you the best option.”
The best part is that you save money, as you won’t be required to pay a large amount to secure the deal you want: our experts will work with you on a one-to-one basis to find you the most affordable mortgage plan and there are no upfront fees to pay.
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