When Rishi Sunak talked through his proposed 95% loan-to-value (LTV) mortgage scheme at the beginning of March, a nation of generation rent breathed a collective sigh of relief.
As a focal part of his Budget laydown, Sunak spoke to those who have long been priced out of the property ladder. With 95% LTV mortgages now on the horizon, first-time buyers finally get the chance to purchase property up to a value of £600,000 with just a 5% deposit. The scheme is scheduled to run from 1st April 2020 until 31st December 2022.
For first-time buyers, could 5% deposits really be the leg up necessary to get on the property ladder? Or will it take more than reduced upfront fees to make property buying more realistic in the UK?
Property deposits and salaries
Currently, mortgage lenders only offer loans up to 4.5x the buyer's salary. For example, if the first-time buyer were to purchase a £200,692 house (the national average for first-time buyer properties), a 95% LTV mortgage would only be available to buyers with a salary of around £42,300. As the average salary for those in their 20s is £26,778, a 5% LTV mortgage would still price out single buyers, as well as those with limited savings.
Higher salaries do not always equal better opportunities to climb the property ladder, either, as areas with the highest paying jobs often have the most inflated property prices. Londoners, for instance, would need a single or combined salary of around £98,000 to pay for their £463,536 first home. In which case, those on above-average salaries in areas with relatively low property prices would benefit the most from the 95% LTV mortgage scheme.
Lower deposits and savings
Sunak's Budget announcement was intended to be positive, but upon closer inspection, many questions were left unanswered. Particularly this statement: "[The 95% LTV mortgage scheme] is a policy [that] gives people who can’t afford a big deposit the chance to buy their own home".
The operative word is "big deposit". The 95% LTV mortgage scheme grants a more favourable entryway for those unable to afford a 10% deposit. However, it is not a guarantee that 'generation rent' or those with limited savings will now suddenly be able to afford a 5% deposit, as the upfront costs remain out of their means.
Given that the national average property price for a first-time buyer is £200,692, deposits would still cost more than £10,000. This is out of reach for the majority of those under 30 years-of-age who, on average, have around £5,440 in their bank accounts and only £191 money saved per month. Even on a 5% deposit, the higher monthly mortgage costs would price out new buyers according to these estimates.
Negative equity and loan repayment
The property market continues to grow in 2021, but if house prices were to fall unexpectedly, recent first-time buyers could owe more money than their house is worth. The low deposits and high loan repayments would incur what is known as ‘negative equity’, making it difficult to sell or remortgage a home.
Where 5% deposits get new buyers on the first rung on the property ladder, negative equity would see that they go no further.
The Bank of Mum and Dad and equity release
Lower LTV mortgages only benefit first-time buyers when mortgages are equally manageable. But we know that reduced deposits typically result in higher monthly mortgages.
As property costs increase (with some experts speculating the new 95% LTV mortgage could inflate house prices), first-time buyers on low/medium incomes or with limited savings will continue to be priced out of the property market.
With this in mind, the process of shoring up funds for a property deposit will still unequivocally hinder first-time buyers. Boris Johnson's aim to turn 'generation rent into generation buy' is still a long way off, it seems, and first-time buyers will almost certainly continue to rely on the Bank of Mum and Dad to make ends meet.
For parents looking to help their children get on the property ladder, equity release provides a useful way to access cash in later life. Equity release mortgages come with no negative equity guarantees, so beneficiaries never repay more than the property is worth. Released cash is tax-free and recipients are free to spend their money as they wish, whether to pay towards home modifications in later life or to help loved ones fund their home-owning ambitions.
Want to find out more? Get in touch with one of our helpful equity release advisers today or call 0800 802 1051 for all the information you need.