The 95% mortgage: What you need to know

Major banks such as HSBC, NatWest, Lloyds, Barclays and Santander have implemented a 5% government backed deposit deal for first time buyers looking to enter the property ladder for homes worth less than £600K. Unveiled by Chancellor Rishi Sunak back in March, the government backing for the scheme will encourage lenders to offer small deposit deals for younger people who have less savings and income than usually required to be eligible for a mortgage.

What are the requirements?

Under the guidelines for the scheme, the eligibility criteria states that the property must be a main residential home (So no second homes or buy-to-let properties sorry investors) and that participating lenders cannot allow the mortgages to be used on new build properties, due to the worry the new builds may struggle to retain their value (Causing issues for the lender if the property has to be repossessed). In addition to this, one must apply for a repayment mortgage and you’ll need to meet a lenders regular mortgage affordability criteria- along with stsifying the aforementioned £600K price limit and 5% minimum deposit.

The opportunity to get on that property ladder for many young people is a golden one which many will take advantage of, allowing themselves to start building equity young . This is especially true for people living in the North East, as due to house prices being more in-line to average earnings a lesser deposit and yearly income is required to get on the ladder under the new scheme.

According to the Telegraph, the 95% mortgage means a buyer would need a deposit of £5,906 and a yearly income of £24, 031 in the North East which is considerably less than the equivalent deposit of £21, 682 and income of £88,218 per year needed in London however. While not without faults due to the nature of the housing market as some areas are still expensive, it still makes owning a house in a more expensive area such as London more achievable than before compared to the funds needed before the scheme was re-introduced.

Overall, it seems like a positive scheme as many people can now follow in the footsteps of their parents and grandparents and become proud homeowners- a feat deemed near impossible in the past by many young people across the country.

Are there any Negatives to the scheme?

While there certainly are positives to the scheme, as touched at before there is some problematic issues concerning it, the main one being that housing demand will increase, resulting in higher property prices as the amount of properties hasn’t kept up with the demand for housing. This is why house prices have risen during the pandemic and this scheme will cause further value increases due to more people having the available funds and government backing. This can cause issues with people saving up for the minimum deposit, especially in more expensive areas such as the latter mentioned London, as it was already expensive with current minimum deposits without further increased house prices which may be a possibility in the future.

According to the aforementioned Telegraph article, at the start of the year there was 14% fewer homes on the market and yet prospective buyers have increased by 17%. Due to this, the question can be asked what is the point of someone buying their first home at 5% deposit when prices are high? Wouldn’t potentially overpaying for a small deposit not make sense in the long term? Especially if the housing market will face some turmoil in the future? Or will it continue to rise past pre financial crisis levels? These are just some the questions a first time buyer has to ask themselves with the unveiling of this new scheme.

For a greater look into the mortgage scheme visit here for official government information and support.