Although it was announced to little fanfare back in February, mid-June will mark two months since the government-backed 95% mortgage scheme launched.
Intended as a leg-up for ‘generation rent’ – that’s most people under the age of 40 – the scheme allows first-time buyers to purchase a property up to £600,000 in value with a 5% deposit. The scheme has been taken up by Lloyds, Santander, Barclays, HSBC, NatWest, and Virgin Money, all of whom have launched mortgages.
The scheme is effectively a government-backed shot-in-the-arm for first-time buyers and lenders. Under the scheme, the government has committed to compensate the lenders for some of the net losses should a repossession occur. This guarantee applies down to 80% of the purchase value and is valid for seven years after the start of the mortgage.
So far, so good. But does it really offer the lifeline the government promises?
Let’s start with the positives. On a very simplistic level, yes, the scheme does offer something to buyers. It could make what Americans call ‘starter homes’ much more affordable for first-time purchasers.
Think of it this way. A young and aspiring twenty-something couple with a deposit of £10,000 could, in theory, purchase a property with a value of £200,000. In parts of the North East, North West, East Midlands, Yorkshire and Wales that’s enough to buy you a decent home. Even in the far pricier south, a £20,000 deposit would be enough for a £400,000 property.
Both of these figures would still require years of gruelling saving, help from mum and dad, or some form of inheritance for most first-time buyers. However, it is much more achievable than the traditional 10 or 15% new homebuyers are used to being quoted.
For lenders and the conveyancing industry, the scheme has virtually no downsides. Lenders can appeal to a segment of the market they’ve long struggled to attract – with all the risks covered by the state. And, conveyancers, get an influx of new instructions from the bottom end of the market to complement those at the top end purchasing due to the SDLT break.
But is the scheme all it seems?
Unfortunately, as regular readers of this blog will have anticipated, there is a catch. While the scheme is commendable in its intent, it also has a few glaring flaws.
The first and most obvious problem concerns housing stock, or the lack thereof. Offering affordable homes to first-time buyers is a nice idea. However, without the housing stock to back it up, it remains just that. Government estimates put the number of new homes needed in England at up to 345,000 per year. The total number built last year was 244,000 – a 1% increase from the year before, but still a huge shortfall.
That leads us on nicely to our next point, another problem with the scheme is house prices themselves. As we’ve already mentioned, a 5% deposit is much more attainable than 10 or 15%, however, that largely depends on where you live. As of January 2021, the average house price in inner London is £514,000. That requires a 5% deposit of £25,000 – still a huge sum for many twenty and thirty-somethings already paying out a large portion of their salaries in rent.
And then we come to the issue of ‘value not price’. Borrowers should be aware that when a lender offers a 95% mortgage, they are doing so on the lender’s valuation, not the price. To give an example, a borrower could purchase a house for £250,000 but, if the lender’s survey values the property at £240,000, it’s down to the buyer to find the extra £10,000. Admittedly, the scheme hasn’t been running long enough for us to assess how common these disparities are, but it could pose a tricky barrier to entry for new buyers.
The last major problem with the scheme is that it isn’t recession-proof, as the government won’t cover lenders or buyers should the property slip into negative equity. That might sound pessimistic given the current buoyancy of the market, but it doesn’t hurt to guard against any eventuality. This is particularly true when it comes to first time buyers, many of whom won’t have the capital to weather another economic downturn.
The Scheme Must Go Further
What conclusion can we draw? Is the scheme a rip-roaring success or floundering dud?
Well, it’s a little of both. On the one hand, any support for first-time buyers is welcome. It’s too early to assess how many buyers will take up the offer, but it should help some at least. What’s more, for those living outside of high-value areas it does represent a decent leg-up into property ownership.
On the other hand, the scheme is unlikely to help anyone living in expensive cities like London. And, until the lack of housing stock is addressed, this isn’t going to change. At the moment the scheme feels a little like a sticking plaster applied to a gaping wound; it’ll doing something to help but not nearly enough.
So what needs to be done?
Schemes like the 95% mortgage must be rolled out in conjunction with building more homes to be truly effective. At the same time, something needs to be done about spiralling living costs and stagnant real wages in the UK. As it stands, the bar simply isn’t low enough for many people under the age of 40 to even consider owning their own home. And until these problems are addressed the affordable housing crisis will continue, no matter how generous the mortgages on offer.