Buying your first home with a small deposit

According to the Bank of England, the biggest issue for most first-time buyers is insufficient savings.  Last year saw a sharp jump in the average amount of a deposit required to get a mortgage, with some people having to provide a deposit equivalent to a full year’s salary.

To help tackle this problem, the Government is introducing a new mortgage guarantee scheme until December 2022. Here Nicola Bennell, Solicitor and Head of Richard Reed’s residential conveyancing team, looks at the latest proposal and other ways to help you buy your first home even if you only have a small deposit.

The 95 per cent mortgage guarantee scheme

During the pandemic, lenders have tended to ask for large deposits and 95 per cent mortgages have virtually disappeared. The new mortgage guarantee scheme, announced in the Spring Budget, is designed to encourage lenders to start offering higher loan-to-value mortgages.

Under the scheme, the Government will guarantee that part of your mortgage which is over 80 per cent of the purchase price, thereby making the loan less risky for the lender.

If you default on your mortgage payments, the lender may ultimately sell your property. With a 95 per cent mortgage, there is a higher risk the sale proceeds will not cover the outstanding loan if property values fall. If you cannot make up the difference, then ordinarily the lender will suffer the loss.

Under the new scheme, the Government will compensate the lender for up to 15 per cent of the original purchase price (the borrower’s deposit covering the first five per cent).

The mechanics may sound complicated, but you do not need to worry too much about them: it will be down to individual lenders to develop and administer mortgage products which meet the Government’s detailed criteria. Most major banks have already said they plan to launch 95 per cent mortgage deals, with other lenders likely to follow suit.

To benefit from the scheme, you must satisfy certain conditions as a borrower. For example, you must:

  • be buying your main home, not a holiday home or a buy-to-let investment;
  • be buying a property in the UK for £600,000 or less;
  • borrow between 91 per cent and 95 per cent of the purchase price;
  • meet standard borrowing requirements to prove you can afford the repayments; and
  • take out the loan during the term of the scheme, between April 2021 and December 2022.

It is expected that first-time buyers will find it easier to secure finance for a home purchase even with a small deposit.

Some words of caution

You should always consider carefully how any funding arrangements would apply to your personal circumstances, and a 95 per cent mortgage may not be the best option for you.

A high loan-to-value mortgage generally means paying a higher rate of interest, so always shop around and take independent financial advice before signing up for a deal. The new scheme guarantees the lender against loss, not you as the borrower.

As with any mortgage, if you cannot keep up the repayments, you risk losing your home and will still have to pay your lender’s costs. So, it is vital to check you can afford the repayments even if your circumstances change or interest rates go up.

You should also think about what could happen if property prices fall in the future. With only five per cent equity in a property, you could end up in negative equity. Negative equity is when your home is worth less than your outstanding loan. Being unable to pay off your mortgage out of the sale proceeds could stop you moving home in the future. You may also find your options to remortgage reduced, leaving you having to pay a higher rate of interest.

Consider the alternatives

If you can afford it, and you think your income is stable or will increase in the future, then a 95 per cent mortgage may still be an attractive option. Even so, it is worth considering some of the alternatives.

Help to Buy

A Help to Buy equity loan is a government scheme which could help you buy a new home with as little as a five per cent deposit. Unlike the mortgage guarantee scheme, you typically only borrow 75 per cent of the purchase price from a commercial lender. The remaining 20 per cent is funded by an equity loan from the Government. You must pay this back when you sell, but the repayment would be based on 20 per cent of the sale value of your home. So, you could end up paying more, or less, than under a conventional arrangement depending on whether house prices go up or down.

Saving for a larger deposit

Saving for a larger deposit may mean delaying your home buying plans, but it could give you a wider choice of properties and mortgage products. It may also reduce the risk of negative equity. Using a Lifetime ISA could help you save towards your first home in a tax efficient way with the Government contributing up to £1,000 each year.

Shared Ownership

Shared Ownership is another affordable home ownership scheme. You buy a share in a property, usually from a housing association, and pay an adjusted rent on the rest. When you can afford it, you may buy additional shares until you own your home outright.

Help from family and friends

Sometimes parents or other family members may offer to help with a gift or loan, or by acting as guarantors. However, this type of assistance needs careful consideration so that everyone is clear on the tax and legal implications.

Buying with others

Pooling resources with a partner or a friend is another possibility, but you must agree how you will share responsibility and ownership of the property. You will also need to decide what should happen in the future, for example, if one of you wants to sell.

If you are buying a property jointly, or with help from someone else, always discuss your intentions with your solicitor. They can ensure the legal documentation protects your interests. This will allow you to enjoy your new home in the way you planned and avoid any disputes in the future.

How we can help

Buying your first home is a milestone, one of the biggest financial and emotional commitments you will ever make. So, it is important to choose a solicitor you can be confident in, someone who can give your purchase the individual attention it deserves.

We can navigate all the legal aspects of your purchase and support you on your journey to home ownership.

For further information, please contact our residential conveyancing team on 0191 567 0465 or email: [email protected]

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