It has been one of the toughest years for first-time buyers in what was already such a difficult market to become homeowners. Today's generation of should-be first-time buyers has been dubbed 'Generation Rent' the generation that simply can't afford to get onto the property ladder. Add three lockdowns, furlough and uncertainty to the mix and you have a recipe for a headache.
As millennials ourselves, you may think that we're biased but we work closely with Right Click Finance, a Wirral Mortgage Broker and in their research of the market, they found that current first-time buyers really do have it a lot tougher than their parents did back in the 80s and 90s. Couples are now looking at paying 4 x their wage for their first home, whereas singletons are taking the full brunt of 8 x their wage just to take a step onto the property ladder. During lockdown, life got even tougher for first-time buyers as both 90% and 95% mortgages were nearly totally extinct, making it nigh-on impossible for first-time buyers to purchase their first home unless they had a miraculous lottery win.
For Lenders, the uncertainty of the pandemic and furlough led to them making tighter lending restrictions, making it harder than ever for first-time buyers. As an estate agent in Wirral, a peninsula that is buzzing with first-time buyers, we had many worried clients who had to put their move on hold. However, Rishi Sunak's 2021 budget delivered some great news: the return of 95% mortgage and this time, they are backed by the government and available from the top Mortgage Lenders.
What are 95% Mortgages?
95% mortgages mean that you only need a 5% deposit, so you'll own 5% of the property and take a mortgage out on the rest of the 95%. So, let's say your property is worth £100,000 - you'll put £5,000 down and take a mortgage out on the £95,000 left. This, however, will result in a higher loan-to-value ratio, which is seen as a riskier investment for Mortgage Lenders, hence why it was so difficult to get them during lockdown when even further risk was added.
Generally speaking, the greater the deposit you have, the lower the loan-to-value ratio and the better chance you have of being accepted for a mortgage. When you do, you'll have access to better mortgage deals and mortgage rates as you are seen as being more trustworthy to a Lender.
Are There Any Risks to a 95% Mortgage?
One of the biggest risks to a 95% mortgage is the risk of going into negative equity. Equity is how much you own in a property, including your deposit and mortgage repayments. If you only own 5% then it only takes house prices to fall that small percentage for you to end up owing more than the property is worth and this is what puts you into negative equity.
Why is this bad? If you're wanting to stay in the house long-term it may not be as bad of a situation as it would if this is a starter house, for example, as house prices may go up and take you out of that negative equity. However, in the short term, it can be difficult to move house or remortgage.
Higher Interest Rates
As we said earlier, the lower your deposit, the higher the loan-to-value ratio and this results in higher interest rates and higher monthly repayments. The majority of first-time buyers will have a Fixed-Term Mortgage, meaning that their interest rate and repayments will remain fixed for a set period of time.
So, is it Better to Wait to Acquire a Larger Deposit?
That's easier said than done and clearly with the government bringing in a scheme specifically for 95% mortgages, you are certainly not alone when it comes to struggling to save for anything more than a 5% deposit.
Whether you wait to save more money or go ahead is totally up to you, we always suggest speaking to a Mortgage Broker who can advise you on your affordability and you can go from there. For example, just because you have a 5% deposit doesn't necessarily mean you can afford a property.
There are many Mortgage Brokers to choose from, as you know we work with Right Click Finance and refer all of our clients to them. If you are interested in speaking to them, you can either go to them directly or ring one of our branches and our team will organise an appointment for you.