WILL FIRST TIME BUYERS PAY PREMIUM RATES ON GOVERNMENTS 5% DEPOSIT MORTGAGES?
Monday March 8, 2021
Is it true? Higher mortgage rates could see buyers paying hundreds more each month…
Aspiring home buyers face paying a premium under the Government’s new 95pc mortgage scheme, experts have warned.
Under the plans, they will be able to secure properties worth up to £600,000 with just a 5pc deposit.
It was hoped that the Government’s guarantee behind the loans would help to lower rates from what is currently being offered by risk-averse banks. But brokers have warned that lenders could continue to charge higher rates, leading to pricey monthly instalments.
Mark Harris of SPF Private Clients, a mortgage broker, estimated that rates for a five-year fixed deal could be between 3.5pc and 4pc, while Martin Stewart of advice firm London Money said they could be even higher.
The average quoted mortgage rate for a 95pc mortgage was 4.07pc in January 2021, according to the Bank of England and analysis by Savills estate agents. Mortgages at 75pc cost less than half that, at 1.75pc.
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.
Lawrence Bowles, of Savills, said that while the guarantee of the Government’s backing offers a certain element of security, it was the scheme’s “laser focus” on the riskier part of the market, those with smaller deposits, which could reflect in lenders’ higher pricing.
Mr Harris said there would likely be a premium on any loan requiring less than a 10pc deposit, adding: “This will be to manage volume and also to give borrowers and incentive to put more money in.”
Mr Bowles added that even if the Government’s guarantee helped bring mortgage rates down, the 5pc deposit loans would still be “much more expensive” than those available under Help to Buy with a 25pc deposit.
Savills data showed purchasing a property worth £274,000 at a rate of 1.75pc and a deposit of 25pc would cost a buyer £846 in monthly mortgage repayments. Buying the same property with a deposit of 5pc on a rate of 4pc would cost £1,374 a month.
The lack of competition in the market may also weigh on mortgage rates. “The lenders supporting the scheme are large, well capitalised banks – this is good for security, but perhaps not from a competitive point of view,” added Mr Stewart.
Low deposit deposit mortgages have all but disappeared from the market since the coronavirus crisis unfolded last year, as lenders shied away from the higher risk typically associated with first-time buyers. This policy has been designed to fill the gap created by this withdrawal.
According to figures from Moneyfacts, a data company, there were 391 mortgages requiring a 5pc deposit in March 2020. One year later this has plummeted to just five deals, and these are restricted to specialist borrowers in certain lending areas.
