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95% LTV mortgages could be returning!
So, why haven’t they been offering 95% mortgages over the last year?
Well, you might remember the world went a bit mad last year, thanks to Covid-19!
Following the initial lockdown, lenders worried this could cause a domino effect.
This EXAMPLE shows what that could look like:
1: People lose their jobs
2: People won't be able to afford their mortgage
3: People are forced to sell
4: Housing market drops
This effect would mean lenders would not want the risk of mortgaging 95% of a property if it could be worth less than 95% in a years time!
So, what is the Governments proposed solution?
They will effectively place a guarantee/insurance behind the mortgage to say if the property dropped below 95%. The Government would therefore take a hit on the shortfall rather than the lender. This offloads the risk from the lender to the Government.
A lender is always thinking about the worst case scenario. How do they get their money back if things go wrong?
- Property Value: £200,000
- 95% mortgage offered: £190,000
A few months later the buyer becomes unemployed due to Covid-19 and is now unable to pay the mortgage. The buyer either sells the property or the lender repossesses if no payment is made. If the property is only worth £180,000 now, the lender is down £10,000 against what they lent for the property. This is why lenders did not want to take the chance of lending this much during the pandemic.
This is also why you get better interest rates for higher deposits. Someone putting in a 25% deposit would be offered a better interest rate than someone with a 10% deposit because it is less likely to end up with negative equity (less likely for the lender to struggle to get their money back).
So the proposed solution to this problem would be for the Government to place guarantee in the background to convert this risk and protect the lenders. This is to encourage “generation buy” instead of “generation rent”.
We are still awaiting full details of the scheme but the following has been hinted:
Who can qualify for the scheme?
The scheme is likely to be available for;
- First time buyers
- People buying a new home and will own no more than 1 property upon completion
It is unlikely they will allow people to purchase a second property on the new scheme.
Which lenders can offer this?
There may be limited lenders available to offer this type of mortgage. Santander have already expressed their intention to provide products in this area.
What will the products look like?
There may also be limited products available as they may require you to only do 5 year fixed rates on this scheme. This could be to eliminate any short-term investors trying to utilise the scheme for profits where it is designed to help buyers obtain their own home. This is yet to be confirmed.
The interest rates are likely to be higher when compared with higher deposit mortgages, again because the risk to the lender of ending up with negative equity is lower.
A team of advisers, eager to remove the complexity of financial products and terminology for clients, ensuring a client centric approach to everything we do. Our mission is to assist you through the entire buying process eradicating and assisting with any hurdles that may occur so we take the stress, not you!
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Twenty 20 is a trading name of Brook Financial Services Limited which is an appointed representative of Mortgage Advice Bureau Limited and Mortgage Advice Bureau (Derby) Limited which are authorised and regulated by the Financial Conduct Authority. Brook Financial Services Limited. Registered Office: The Old Courthouse, 60a London Road, Grantham, Lincolnshire, NG31 6HR. Registered in England Number: 07311674