Housing and mortgages have long been a bell-weather for the economy. Before the 2008 financial crash, when there was general optimism that the economy would grow it was possible to get a mortgage for 110% of your property value. Offered on the expectation the economy and house values would continue to grow the 110% mortgage contributed to the crash and, since then, credit, even when secured on a house, has been harder to get. Now, you can get a 5% deposit mortgage!
However, tighter credit has meant it’s harder for people to get on the housing ladder. Lenders have typically expected at least a 10% deposit. With an average house in Sheffield selling for around £210,000 this meant a lot of saving for potential buyers.
The 5% deposit mortgage
As part of his plan to get the economy moving again Rishi Sunak has introduced rules that make it easier to get a mortgage with just a 5% house deposit. These mortgages, similar to the previous scheme are intended to make it easier for people to move on the property ladder.
While a 5% house deposit will still be a significant sum, it’s £10,500 for that average Sheffield house. It makes the prospect of a mortgage much more realistic for many. The average salary in the UK is about £31,000 a year, so while saving that 5% house deposit won’t be easy, it is a lot more attainable for many than 10%.
The scheme works by offering a guarantee to lenders against losses. Any lending is a risk, and banks and building societies know that some of the money they lend will not be repaid. The government scheme, by guaranteeing some of the losses, means that lenders will offer more loans, knowing that although there is more risk, their losses will be minimised.
Who is eligible?
Unlike Help-To-Buy the 5% house deposit scheme is open to everyone, not just first-time buyers. This means that if you’re looking to move to a new home you can still take advantage of the scheme. The main restriction is that it is limited to properties costing less than £600,000.
The biggest hurdle is that you will still have to get a mortgage. Although the government is shouldering some of the risk, the lenders will still lose if they get their sums wrong. The aim of the scheme is to make mortgages available to people with less saved than a deposit, so lenders will only grant a mortgage if they are confident you will repay. Essentially, it’s now slightly easier to get a mortgage, but there is no guarantee.
What has the reception been?
Many people have voiced concern about 5% house deposit mortgages. Highlighting that easy credit was a major factor behind the 2008 financial crash they are concerned this might create problems in the future. These concerns are also driven by the uncertain economic climate in the wake of the coronavirus pandemic.
Many, however, have welcomed the scheme, seeing it as a crucial part of keeping the housing market moving. But the people who have welcomed it most are those who now see their dreams of buying their own home as far more likely to come true.
The scheme will continue until 2022, with lenders having to offer five-year fixed term mortgages. Are you are looking to buy your first home, or want to move somewhere different? This may be the ideal time.
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