Saturday March 27, 2021

The low deposit lending market may finally be opening up after the pandemic hammered it a year ag
When Chancellor Rishi Sunak announced plans for a mortgage guarantee scheme in last month’s Budget it was hailed as a lifeline for first-time buyers.
Some of the biggest banks in the UK have already signed up to the scheme, which from April will offer 5pc deposit mortgages using Government-guaranteed loans.
But now, a handful of smaller lenders have launched their own 5pc deposit mortgages without the support of the Government’s guarantee scheme – and before it kicks in.
Yorkshire Building Society was the first to relaunch 5pc deposit mortgages via its Accord Mortgages brand, at an interest rate of 3.99pc. Since then Bank of Ireland and Skipton Building Society have both said they will return to the 95pc mortgage market, offering five-year fixed deals at 4.05pc and 4.17pc respectively.
Borrowers are likely to pay a premium for the new 5pc deposit deals, as they are seen as being more risky to lend to. Those wanting one of these mortgages could benefit from waiting until more lenders join the market, so that increased competition leads to lower rates.

What is the Government’s mortgage guarantee scheme?

From April 2021, buyers will be able to purchase homes worth up to £600,000 with a 5pc deposit and a Government-backed mortgage. They will have the opportunity to fix their initial mortgage rate for at least five years.
The scheme will be available for new mortgages until December 31 2022. Major high street lenders including Lloyds, Natwest and HSBC are already confirmed as providers.
The move will provide a lifeline for first-time buyers, many of whom have been shut out of the market after lenders withdrew low deposit mortgages en masse when the pandemic began.
Back in March 2020, there were 391 5pc deposit mortgages on the market, according to Moneyfacts, a data company. By May 2020, this number had plunged to 41. At the beginning of March 2021, there were only five – and these were highly specialised.

Going it alone 

The Government’s policy of backing these low deposit mortgages was in part to help increase their availability, which had all but disappeared when the pandemic started.
Yorkshire Building Society was mulling a return to the 5pc deposit market before the Budget. Jeremy Duncombe of the firm said: “What the Government scheme has done is given confidence to us that other lenders will follow suit, and confidence to the market to return to 95pc lending.”
Lenders which take part in the guaranteed scheme must pay the Government a commercial fee for each mortgage, explaining in part why so many are now offering them outside the programme. It means lenders are compensating for any expected losses and the cost of providing the guarantee.
The Government scheme will be available for new mortgages until the end of 2022 and major high street lenders including Lloyds, Natwest and HSBC are already confirmed as providers.
Alex Beavis, of Skipton Building Society, said: “More lenders means customers have more choice, a wider chance of being accepted for a mortgage, and a broader range of products to suit individual needs.
“In this respect, the mortgage guarantee scheme has already been a success, even before the first mortgage has been written through the scheme.”
But lending in this area comes with strict affordability requirements, which Mr Beavis said would feature in the 95pc market for the foreseeable future.
Yorkshire Building Society will only lend a maximum of 4.49 times the income of first-time buyer borrowers using its 5pc deposit deal. The mortgage, with a maximum loan size of £500,000, also cannot be used to buy flats and new-builds. Skipton has put in place the same maximum loan to income ratio and restrictions for applicants currently on furlough.

What does it mean for borrowers? 

Yorkshire Building Society and Skipton’s deals are only for first-time buyers. However, mortgages offered under the Government-backed scheme will be open to all residential borrowers, excluding buy-to-let and second home owners.
Chris Sykes, of mortgage broker Private Finance, said the Government’s scheme had restored faith in lenders that it would look after the smaller deposit market. “It has certainly rekindled some confidence. Once the first domino has fallen others are definitely encouraged.
“We are hearing on the grapevine a lot more lenders will be coming back to the 95pc market soon, potentially some before April and many more after,” he said.
Mr Sykes said borrowers might benefit from waiting until more lenders come to market for better rates. He said: “The rates being charged at the moment are definitely high…because of the risk at lending at 95pc.
“But competition drives rates, so from a pricing standpoint if borrowers can wait a little while until more lenders are in the market it would be the intelligent thing to do.”