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Mortgages

Return of the 5% Deposit Mortgage: Tips for First-Time Buyers

The return of 95% LTV mortgage is likely to come as welcome news for millions of prospective homebuyers. Across the UK first-time buyers have found themselves increasingly priced out of the market; this is due to the excessive deposit requirements of most major lenders.

This month several major banks confirmed their intent to take part in a new UK government mortgage guarantee scheme, enabling them to offer 5% deposit mortgages for the first time in years. Barclays, HSBC, NatWest and others are all set to begin offering 95% LTV mortgages once again, enabling applicants to qualify with a deposit of just 5%.

How Much is a 5% Mortgage in Real Terms?

Saving for a 5% mortgage can vary in difficulty depending on your situation and location, a 5% down payment on a home in Yorkshire and the Humber currently averages around £9,250. This increases to just over £14,000 in East Anglia, £18,000 in the South East of England and around £29,000 in London.

Buyers in Wales and Scotland can expect to pay just under £9,000 as a 5% deposit, with Northern Ireland falling to around £7,400.

Affordability will therefore be determined primarily by location, as well as your savings and income. In most instances buyers will still find themselves needing to save thousands to cover both the 5% down payment requirement and the various fees associated with setting up a home loan.

Administration fees, valuation fees and legal fees- costs which can often add up to a further 1%-2% of the property’s market value.

Tips and Guidelines for Savers

Representatives of several major banks and lenders have been offering their own tips and guidelines for savers looking to reach the new 5% deposit threshold and take their first step up the property ladder.

While there are no quick-fix shortcuts to amassing considerable sums of money, these tips by lenders offer guidance for people serious about buying their own home.

  1. Carefully Consider Your Financial Health

This means taking an in-depth look at your outgoings, lifestyle, income and debts. If there are any expenses you can curb (or eliminate) or smaller debts you can afford to pay off, it may be better to do so before considering taking on debt.

  1. Set Up a Dedicated Savings Account

Put all the money you are saving for your deposit into a dedicated savings account, Separate your finances strategically rather than pooling everything into one collective account.

  1. Set Realistic Goals

Staying motivated holds the key to reaching major savings targets, it is important to be realistic in terms of when you can expect to accumulate the funds required. If it is going to take you several years to save for a deposit then you must set yourself goals and acquire funds accordingly.

  1. Consult with an Independent Broker

Last but not least, consulting with an independent broker is a useful way of gaging affordability while also getting to know the new 95% LTV options that are available

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Mortgages

5% Deposit Mortgages Now Back on the High Street

For the first time in years, several major lenders have reintroduced 95% LTV mortgages with a deposit requirement of just 5%.

An initiative aimed at encouraging more first-time buyers to get on to the property ladder in England, these government-backed loans are now available from Lloyds, Santander, Barclays, HSBC and NatWest.

Experts, however, have advised movers and first-time buyers alike to consider stretching to deposits of 10% or more where possible, in order to avoid higher interest rates and elevated overall borrowing costs.

A Welcome Return of the 95% LTV Mortgage

Details of the scheme were unveiled by Rishi Sunak in this year’s budget, during which the chancellor confirmed that 5% deposit mortgages would be available to anyone looking to purchase a property up to the value of £600,000.

The property being purchased, however, must be the buyer’s only home and their intended place of residence, not a second home or a buy-to-let property. It has also been confirmed that new-build properties will be exempt from the 95% mortgage offer.

Encouraging as many lenders as possible to take part in the initiative, the government has offered a partial guarantee (of up to 15%) in compensation to lenders, in the event of non-repayment on the part of the borrower.

Major banks including Lloyds, Santander, Barclays, HSBC and NatWest have already begun offering mortgages with an LTV of 95%, while Virgin Money has confirmed plans to do so in May.

Higher Risk, Higher Interest Rates

Upon announcing the scheme, the chancellor acknowledged the difficulties first-time buyers have traditionally faced putting together excessive deposits for home purchases.

“Every new homeowner and mover support jobs right across the housing sector, but saving for a big enough deposit can be hard, especially for first-time buyers,” Rishi Sunak said.

“By giving lenders the option of a government guarantee on 95% mortgages, many more products will become available, boosting the sector, creating new jobs and helping people achieve their dream of owning their own home.”

Even where the 95% LTV mortgage is now available, lenders will continue to carry out stringent affordability and eligibility checks on applicants.  Discrepancies in job status, income or credit history, even as a result of the effects of the COVID-19 pandemic, could make it difficult or impossible for applicants to qualify.

In addition, 5% deposit mortgage customers have been told to expect slightly higher rates of interest than those attached to mortgages with a lower LTV. Some of the banks involved in the scheme have confirmed two-year fixed-rate deals at 4%, up to 75% higher than a comparable mortgage with a 10% deposit.

“It reflects the extra risk the bank is taking on. I think over the long term that is a pretty competitive rate for customers,” said Lloyd Cochran, head of mortgages at NatWest.

“One of the things we do is ensure that the customer can afford that rate. We also ensure… the customer can afford that loan if interest rates were to rise.”

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Mortgages

Paragon Bank incentivises Eco-Conscious Landlords with New 80% LTV Mortgage

Landlords in the United Kingdom have for some time been urged by the government to make every possible effort to improve the energy efficiency of the properties within their portfolio. Little, however, has been provided by way of financial incentive for those wishing to do so.

Recent proposals introduced by the government will make it a formal requirement for every home within the private rental sector to have at least an EPC rating of C by 2025 for new tenancies. By 2028, all homes within the PRS without exception will need to have a C rating or higher.

In order to motivate buy-to-let landlords to purchase more energy efficient properties and work towards more sustainable portfolios, Paragon Bank has announced the introduction of an all-new 80% LTV mortgage for new and established landlords. The new range of high LTV mortgages will be available for the purchase of standard rental properties and houses of multiple occupation (HMOs), on the condition that they currently have an EPC rating between A and C.

It is hoped that the initiative will encourage more landlords to purchase more environmentally friendly properties, in order to increase the prevalence of rental homes with an A to C energy rating within the private rental sector.

Slow but Steady Progress

The most recent MCHLG English Housing Survey indicated that the proportion of homes within the private rental sector with energy ratings of A to C has been increasing significantly over the years. It is estimated that there are currently 1.8 million A to C energy-rated homes in the PRS, up an impressive 272% over the past 10 years.

This, however, also means that around 60% of all rental properties within the sector still have an energy rating of D or lower. While many have welcomed the government’s proposals regarding a minimum A to C energy rating requirement by 2028, others have criticised the lack of direct incentives available for landlords looking to make positive improvements.

The new 80% LTV mortgage available from Paragon Bank will be offered as a five-year fixed rate loan starting at just 3.99% APR, including £350 cashback, no product fees and free valuations. The lender also confirmed that the loans would be available for landlords looking to purchase single self-contained properties and HMO.

Speaking on behalf of Paragon Bank, managing director of mortgages Richard Rowntree commented on the progress being made within the BTL community towards a more sustainable and energy efficient future.

“Landlords have made great strides in adding more energy efficient homes to the PRS, or upgrading properties to C or above standard, over the past decade,” he said.

“However, more needs to be done as the government moves towards its net zero carbon target by 2050 and landlords have a key role to play in that,”

“Our new range of products at 80% LTV for homes with an energy rating of C or above will be an incentive for landlords to add energy efficient homes to the sector, benefitting tenants through lower energy bills and the environment through reduced consumption.”

Mr Rowntree went on to state that it is also the responsibility of lenders to ensure that landlords looking to make conscientious improvements to their properties have access to the financial products they need,” he continued.

“If landlords are to improve the energy efficiency of PRS stock, they need the finance to enable them to do so.

“Making sure there are attractive options to add new stock, whilst recognising the efforts to upgrade existing properties, is an important element of this.”

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Other Finance News

Making Sense of the New Inheritance Tax Rules

As part of his 2021 budget, Chancellor Rishi Sunak announced a series of minor alterations to the rules regarding inheritance tax. Specifically, Sunak confirmed that the residence nil-rate band will be frozen temporarily, but how will the alterations set to come into place after April affect the average UK resident?

When a person dies, the total value of their estate is subject to taxation at the time it is passed on to their beneficiaries. This includes the cumulative value of their possessions, their property and their savings.  HM Revenue and Customs claims a share of the proceeds in the form of inheritance tax.

Outlined in this year’s budget, Mr Sunak confirmed a series of minor alterations to the inheritance tax system, which could result in some people paying more than in years gone by. Until now, the minimum threshold after which inheritance tax applies has stood at £325,000. This has meant that for a number of years, only those inheriting combined assets valued in excess of £325,000 have been required to pay inheritance tax.

This year’s big announcement regarding inheritance tax policy was the addition of a further £175,000 allowance, specifically for passing a home on to a child or grandchild. The full £325,000 original allowance still applies, though is now coupled with an additional allowance of £175,000.

This further £175,000 allowance, officially called the residence nil-rate band, effectively means that if an estate is allocated to a beneficiary who is a direct descendant of the deceased, no inheritance tax will be payable on the first £500,000 of its value. Many had expected this £175,000 allowance to be increased in accordance with inflation, but we now know it will stay at the same level.

In addition, some have criticised the government for failing to increase the standard inheritance tax threshold in more than a decade. The most recent increase occurred in April 2009, when the threshold was changed from £312,000 to the current £325,000. Critics argue that this fails to take inflation or rapidly elevating property prices into account, ultimately resulting in more beneficiaries than ever before facing elevated inheritance tax.

Speaking on behalf of MoneySavingExpert, money editor Johanna Noble pointed out that what appears to be a positive announcement on the surface but could actually result in more people finding themselves liable for inheritance tax.

The best thing to do is to make sure you have an up-to-date will, she added.

“While a freeze in inheritance tax may sound like a good thing, it means that in the long-run, more people will pay it, and those who do will pay more,” she told Express.co.uk.

“This is because the value of assets such as homes, cash and investments are likely to rise with inflation, as will wages, pushing some estates over the threshold – when you’ll start paying tax – and making more of the estate taxable.

“The most important thing to do is make sure you’ve got a will in place, so your estate goes where you want it to. It’s also worth considering if you want to gift some money before you die as some smaller gifts, including wedding and charity gifts, are exempt.

“However, if you have sizeable assets, it’s worth getting tax advice from a professional.”

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Mortgages

Mortgage Approvals in February Up Almost 40% on Ten-Year Average

There was further evidence of robust real estate market activity in February, with official data indicating a near 40% increase of mortgage approvals compared to the ten-year average.

New figures from the Bank of England show that around 87,700 mortgages were issued for residential property purchases in February, far above the average of just 63,500 over the last decade.

Total mortgage approvals dipped slightly from the 103,700 recorded in November last year and were also approximately 10% down on the 97,400 approvals recorded in January. The figures, however, are still highly reassuring given how comparatively few buyers in February were planning moves based on the government’s stamp duty holiday, which at the time was set to conclude on March 31.

Buyers who acted early had the opportunity to save up to £15,000 on their property purchases. Mortgages approved in February would not have given prospective buyers enough time to complete their purchases before the original deadline.

It has since been announced that the stamp duty holiday will remain in place with the full £500,000 nil rate band until the end of June, after which a reduced £250,000 nil rate band will apply until the end of September. This is likely to result in another significant spike in mortgage lending activity over the spring and summer months.

95% LTV Mortgages Return to the High Street

Along with the prospect of saving up to £15,000 by avoiding stamp duty, buyers are also likely to be motivated by a new mortgage guarantee scheme recently outlined by the government. The scheme is designed to encourage lenders to reintroduce 95% LTV mortgages with just a 5% deposit requirement, paving the way for property ownership for more first-time buyers than at any point in recent years.

Several banks announced that they would be taking part in the scheme at some point during April, while others immediately took advantage of the government’s offer and reintroduced 95% mortgages right away.

‘Mortgage rates remain low and with the government introducing a guarantee scheme on high loan-to-values, there will be more choice for first-time buyers, the lifeblood of the market,’ one commentor said.

‘With several lenders including Skipton, Yorkshire Building Society and TSB already launching 95 per cent deals, and others expected to follow suit in coming weeks, rates could also potentially fall, which is further good news for borrowers.’

Total Borrowing Hits New Six-Year High

Along with mortgage approval volumes, the total amount of money borrowed for residential property purchases also reached a five-year high last month. The figures released by the Bank of England indicate a net total of £6.2billion borrowed against properties in February – more than any single month since March 2016.

While mortgage rates may have increased slightly since last summer, average interest is still hovering at around just 1.9%. Rock-bottom rates are expected to linger for the next few months at least, though are likely to continue climbing as the UK economy returns to strength.

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Other Finance News

Housing Market Performs Beyond Expectations in March, Halifax Data Suggests

The run-up to the easter home buying season has apparently put an early “spring in the step” of many movers and first-time buyers, according to the latest figures released by Halifax.

Part of the biggest High Street mortgage provider in the UK, the Lloyds Banking Group, Halifax spoke of a resurgence in activity in the country’s real estate market throughout the course of March. The improved performance had been predicted by many, because of the confirmed stamp duty holiday extension covering most property purchases in England, Wales, and Northern Ireland.

Growing demand for desirable properties in key areas across the UK resulted in average house price growth of 6.5% for March, compared to the same time in 2020. This took the average UK house price to just over £264,600.

Affordability Issues for First-Time Buyers

This reassuring increase in average property prices will undoubtedly come as welcome news to current homeowners and those planning imminent moves, however, it is likely to cause further concerns for many first-time buyers, for whom affordability may have been an issue even before the recent house price growth, particularly those who have had their income and job status affected by the COVID-19 crisis are unlikely to be motivated by the prospect of higher property prices.

Likely to serve as a lifeline for many, several major High Street banks have confirmed their intent to take part in a government backed loans scheme, which will enable them to reintroduce 95% LTV mortgages for the first time in years. This will open the door to mortgages that require only a 5% deposit, giving more first-time buyers the opportunity to get on the housing ladder.

Long-Term Market Projections

It remains to be seen how the UK’s slow return to some form of normality affects the real estate market, nevertheless, some experts believe that a prolonged slowdown over the course of the year is largely inevitable, due to the lingering effects of the COVID-19 pandemic.

“With the economy yet to feel the full effect of its biggest recession in more than 300 years, we remain cautious about the longer-term outlook,” commented Russell Galley, managing director at the Halifax.

“Given current levels of uncertainty and the potential for higher unemployment, we still expect house price growth to slow somewhat by the end of this year.”

Monthly house price growth for March was recorded by the Halifax at 1.1%, suggesting that the average UK property had increased in value by just over £15,400 over the past 12 months. Performance that exceeded most expectations, given the catastrophic economic impact of three consecutive lockdowns.

“Casting our minds back 12 months, few could have predicted quite how well the housing market would ride out the impact of the pandemic so far, let alone post growth of more than £1,000 per month on average,” Mr Galley added.

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Mortgages

Demand for Specialists Mortgages on the Rise for High Net Worth Individuals

With the recent budget announcements putting personal and business finance firmly in the spotlight, it has become more important now than ever to focus on the issues facing homeowners and potential new borrowers. With many incomes being significantly impacted by the Covid crisis over the last 12 months, it is anticipated that there will be a sharp increase in the need for specialist mortgage products.

Meeting the strict mortgage criteria, necessary for most high street lenders, has become problematic for those looking to purchase or re-mortgage a property. Banks are less willing to accept applications from the self-employed due to being risky and complicated, resulting in an increased number of clients requiring specialist residential finance options.

This issue does not only effect lower income borrowers but also those in the high net worth category. High net worth individuals (HNWI) have seen an increased level of mortgage application rejection and longer delays. Butterworth Mortgages recent research data suggests that as much as 18% of HNWI were turned down for a mortgage in the last 10 years, which is an increase of 6% from a similar survey conducted in 2019. A significant 51% of applicants, who had successfully or unsuccessfully applied in the last 10 years, where at one time or another turned down.

Securing credit due to complicated income structures appeared to be one of the main issues with HNWI’s applications, with 63% stating they had been rejected for this reason. Also, 78% of HNWIs feel that the rigid methods used by the banks prevents them from accessing financial products forcing them to look elsewhere.

With confidence in high street banks stated to be at an all-time low, a huge opportunity has opened for mortgage intermediaries to direct borrowers to the right specialist lender who will be able to cater for clients who have complicated or multiple sources of income.

Mortgage brokers across the UK have reported a steady increasing demand in specialist mortgage products, which due to the pandemic, is expected to continue to rise. Thankfully, many lenders have adjusted and adapted to meet the changes required, allowing a more flexible and broader approach to applications from a wide range of income source types.

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Mortgages Other Finance News

Co-Founder of Anorak Confirms Planned Collaborations with Mortgage Brokers

One of the web’s leading protection providers has confirmed its plan to establish partnerships with mortgage brokers, in order to make it quicker and easier for borrowers to safeguard themselves from future financial issues.

In a recent interview with FTAdviser, Anorak’s co-founder and chief executive officer, David Vanek, explained his intention to begin selling protection with mortgage broker support, with further announcements on the specifics of these collaborations coming soon.

“We can either be their protection service so they refer to us their protection clients to our online journey,” he said. “But some [mortgage brokers] have expressed a keen interest in using our digital platform for their own benefit and their protection team,”

“So a mortgage broker will use Anorak on a fully white label basis to help their advisers and their clients get the right protection.”

Anorak is an established and reputable Axa-backed online protection provider, which offers independent expert advice on critical illness cover, income protection and life insurance.  All of which are considered essential for prospective borrowers applying for a mortgages and similar long-term secured loans.

After answering questions on employment status, smoker status and additional lifestyle factors, customers are provided with a series of quotations and coverage options available.

Speaking on behalf of Anorak, Mr Vanek stated that the current protection market was “very dated” and needed to be significantly modernised in order to help borrowers access the advice they need on the various forms of financial protection available.

“Most of the distribution partners we are discussing with, whether they are banks or a digital platform, what they want now is an online-first touchpoint with a digital platform that can help the client go quite far before someone needs to pick up the phone and talk to them,” he said.

He also emphasised the importance of providing every customer with fully independent advice and personalised quotations, rather than the generic ‘robo-advice’ typically provided via online channels, prior to telephone calls or in-person meetings taking place.

“We are passionate about advice, and we think that everyone should get access to advice online first and be educated about what type of protection they need,” he said.

“It doesn’t mean that because it’s online, it’s online-only. I think we still see and value the human expertise but it should be online first.”

The announcement from Anorak closely follows a warning issued by an independent protection expert panel, concerning the inadequacies and inefficiencies of the current customer buying experience where insurance and financial protection products are concerned.

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Bridging Loans

Bridging Lenders Remain Optimistic for the Future of UK Economy

A recent opinion survey, published by The Association of Short Term Lenders (ASTL), indicates a positive long-term outlook for the bridging market and the UK economy as a whole. Following the budget announcement in early March, more than 73% of bridging finance providers remain confident about the long term health of the economy, in comparison with just 64% recorded last July.

The survey shows that 87% of bridging lenders are expecting a significant increase in their business turnover over the next 6 months, with a 77% expectation that the wider bridging sector will achieve a healthy growth in turnover too. These figures have shown a great improvement on the previous survey, where 36% of responders predicted the sector as a whole to shrink with 41% of bridging providers anticipating a decline in their own business turnover.

On the subject of competition between bridging loan providers, survey participants were divided in their opinion, with 47% believing competition will remain the same over the next six month period and 43% expecting an increase. A mere 10% thought competition would actually decrease.

Vic Jannels, CEO at the ASTL, said: “This latest sentiment survey of the ASTL’s members is an important one as it gives us an opportunity to take a step back and reflect on the year we have been through. The significant increase in positivity compared to last summer reflects not only the general optimism about the rollout of the vaccination programme, but also the way that bridging lenders have been able to evolve and adapt to the changing environment.

“The sector is in a strong position to continue to support the recovery with fast, flexible short-term lending to meet the diverse needs of a range of customers.”

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Other Finance News

Furlough-Friendly Mortgage Applications Continue to Rise

Brokers across the UK reported increased demand from mortgage applicants seeking flexible and accessible mortgages, having had their employment status and income affected by mandatory business closures. Furlough-friendly mortgage activity increased almost 70% in January, followed by a further 8% increase in February, Legal & General reports.

The news has been welcomed by industry observers, among whom many had predicted stagnation or a significant decline after January’s rapid growth. With the UK having been plunged into another major lockdown, the real estate market was once again predicted to slow down.

It was estimated that approximately 4.7 million people were still on the government’s furlough scheme in February with no clear indication as to when they would return to work.

Stamp Duty Holiday Incentives

A major spike in mortgage application activity between December and January was attributed largely to the original March 31 stamp duty holiday deadline.  Motivated by the potential to save thousands of pounds by avoiding or reducing stamp duty liability, many buyers attempted to rush through property purchases during this time.

This resulted in an unprecedented 230% spike in furlough-friendly mortgage applications between December and January, as those being supported by the furlough scheme at the time sought to take advantage of the stamp duty suspension.

With most major lenders demonstrating reluctance to applications from furloughed workers, many were turning to brokers to access specialist home loans from independent lenders not available on the High Street.

Adverse Effects on Financial Status

The same report from Legal & General indicated a 27% increase in the number of searches brokers performed for lenders who would consider working with customers who had previously missed mortgage payments.

A spokesperson from Legal & General said that this reflects the growing number of individuals and households that have had their financial status adversely affected by the COVID-19 crisis.

As demand for desirable properties in key locations across the UK remains strong, average house prices are also increasing steadily.

According to the Office for National Statistics, average property prices in the UK were up around 8.5% compared to the same time last year. Over a 12-month period where many had expected house prices to plummet across the country, the real estate market weathered the impact of COVID-19 better than most could have predicted.

“The wide-ranging implications of COVID-19 are continuing to play out in the mortgage market and it’s clear that advisers are playing a critical role for borrowers,” said Clare Beardmore, head of mortgage transformation and operations at Legal & General Mortgage Club.

“Not only are many focusing their efforts on finding lenders that meet the needs of those with more complex financial circumstances, including those on furlough, but they are increasingly supporting others with more affordable routes onto the ladder too.”

Prospective borrowers concerned about their eligibility for traditional High Street mortgages are being advised to consult with independent brokers, rather than approaching banks directly.

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