The details of the first deals launched using the government’s new 95% LTV mortgage guarantee scheme have been unveiled - this is what’s now on offer as well as your other options
Several major lenders including Lloyds, Halifax and Barclays have started offering 95% loan to value (LTV) mortgages as part of the government’s new scheme, first announced in last month’s Budget.
The new scheme means more lenders are accepting borrowers with just a 5% deposit, but it comes as house prices reach record highs - forcing new buyers to take an even bigger step to reach the first rung on the property ladder.
So will the new scheme actually have a meaningful impact on those struggling to afford their first home and are the deals worth grabbing before they run out in December or is it better to hold out for a bigger deposit and a standard mortgage? We take a closer look.
To give the housing market a boost, Chancellor Rishi Sunak announced a new government-backed mortgage scheme at the start of March in his last Budget.
It will run from April 2020 until December 2022 and lets more borrowers apply for a 95% loan-to-value (LTV) mortgage. This means they only need a 5% deposit and can borrow 95% of the cost of the property. It works in a similar way to the 5% Help to Buy government-backed mortgages which were closed in 2016.
While it’s designed to help first-time buyers to get onto the property ladder, it’s open to anyone as long as it’s not a second home or a buy-to-let property, it’s worth £600,000 or less, and it’s not a new-build home.
The government will guarantee part of the loan if the lender loses money, if for example the homeowner defaults on their mortgage payments. It guarantees the amount of the mortgage over 80%, which for a 95% mortgage would be 15%.
This is to offer lenders more security when lending money and it’s hoped the scheme will encourage more lenders to offer 95% deals which had all but disappeared as a result of the coronavirus pandemic.
In January 2020 there were 313 95% LTV mortgages available but by June they had all been pulled, according to research from Defaqto. Since then a few of these mortgages have been briefly available, but this week marks the first time since May 2020 that all of the mainstream banks are active again in this space.
But not all of the increase is a result of the government guarantee. Some lenders - including Coventry Building Society and Yorkshire Building Society - simply launched their own 95% mortgage deals instead.
Sunak said: “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.
“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.”
A number of high street lenders have launched 95% mortgages as part of the scheme and others, including Virgin Money, are due to launch products later this month. There are a range of two and five-year products to choose from and Santander is offering a three-year mortgage.
The market-leader is a two-year fixed-rate mortgage from Natwest, with a 3.90% interest rate and no fee. But the best rate for a five-year fixed rate 95% mortgage is from Coventry Building Society, at 3.89% with a £999 fee, and is not available through the guarantee scheme.
Here are the deals on the market right now:
Bank of Scotland 95% mortgages
Two-year fixed-rate mortgage: 3.73%, £999 fee or 4.00%, no fee
Five-year fixed-rate mortgage: 4.00%, £999 fee or 4.20%, no fee
Barclays 95% mortgages
Two-year fixed-rate mortgage: 3.99%, no fee
Five-year fixed-rate mortgage: 4.09%, no fee
Halifax 95% mortgages
Two-year fixed-rate mortgage: 3.73%, £999 fee or 4.00%, no fee
Five-year fixed-rate mortgage: 4.00%, £999 fee or 4.20%, no fee
HSBC 95% mortgages
Two-year fixed-rate mortgage: 3.99%, £999 fee or 4.29%, no fee
Five-year fixed-rate mortgage: 4.29%, £999 fee or 4.49%, no fee
Lloyds 95% mortgages
Two-year fixed-rate mortgage: 3.73%, £999 fee or 4.00%, no fee
Five-year fixed-rate mortgage: 4.00%, £999 fee or 4.20%, no fee
Natwest 95% mortgages
Two-year fixed rate mortgage: 3.9%, no fee
Five-year fixed-rate mortgage: 4.04%, no fee
Santander 95% mortgages
Two-year tracker mortgage: 3.99%, no fee
Three-year fixed-rate mortgage: 3.99%, no fee
Five-year fixed-rate mortgage: 4.09%, no fee
You don’t have to choose a government-guaranteed mortgage and there are other 95% LTV options available, including the best-buy from Coventry Building Society as mentioned above.
It’s also worth weighing up all the costs involved. If you can save a bigger deposit, you’re likely to find a much better rate and you’ll be able to own more of your home from the start.
Katie Brain, banking expert at Defaqto, said: “When the pandemic started, all the mortgage deals for first-time buyers and those with small deposits just disappeared. Many who had saved hard for a deposit found themselves unable to get finance and were effectively shut out from the property market.
“The new government-backed mortgages are very competitive for anyone who wants a two-year fixed deal, although borrowers should always consider all the options before taking out a loan.”
To a borrower there’s no difference between taking out a 95% mortgage with the guarantee scheme or one outside of the scheme. The important things to look at are the costs involved, the criteria for the mortgage, and how it works such as how many years it's fixed for.
The new scheme is expected to provide a boost to the housing market. For homeowners who aren’t able to save up a big deposit, which is now a lot harder as house prices reach record highs, it may give them the chance to buy a home with a smaller deposit.
As the government is backing these loans, it’s hoped lenders will be given the confidence to launch more of these 95% deals, which should in turn push prices down to make the mortgages more competitive.
However, as lenders are already starting to offer these loans independently and not through the guarantee scheme, this suggests that the market is already confident enough to support loans of this size without government intervention.
Iain McKenzie, chief executive of The Guild of Property Professionals, said: “The resilience of the housing market in the face of coronavirus has seen house prices repeatedly hit new highs, and we expect this trend to continue in the coming months.
“There is the danger that first-time buyers could be increasingly priced out of the market, and this government scheme goes some way towards helping young people.
“Do shop around if you’re tempted by taking out a 95% mortgage, as some of the rates on offer for a two-year fixed deal are 3.9% - more than 2% higher than the cheapest deals on the market.”