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 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 the Prime Minister 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 supports jobs right across the housing sector, but saving for a big enough deposit can be hard, especially for first-time buyers,” the Prime Minister 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 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 that the customer can afford that loan if interest rates rise.”