The UK property market has experienced a rollercoaster ride since the first lockdown, having been buoyed by the Stamp Duty Holiday in July 2020, and then slowed in the period when it was set to expire in March 2021. In the recent budget, it was confirmed that this will be extended to the end of June 2021, with the nil rate threshold at £500,000 and then for a further three months at £250,000 before reducing to the normal level of £125,000 from October.
Other key measures were also announced, such as the government’s promise to underwrite 95% mortgages (if the property is valued at under £600,000). Below, our financial planning team here at Vesta Wealth explores the implications for mortgages and the UK property market in 2021.
The 95% mortgage guarantee
It has been a while since 95% mortgages have been widely available in the UK. Following the 2008-9 global financial crisis, banks largely withdrew these deals. In the second quarter (Q2) of 2007, mortgages with a loan-to-value (LTV) ratio of 90% or more comprised 11% of the market. By June 2019, the figure was just 5.5%. UK regulators have been keen to prevent a repeat of events in 2008-9, and high LTV products are often seen as products which expose banks to greater risk. They have also been regarded as risky for borrowers, since a smaller deposit could mean they are at higher risk of default e.g. due to high monthly mortgage repayments reducing disposable income, and low emergency savings in the event of job loss.
95% mortgages can also leave borrowers more vulnerable to negative house price changes, leaving people with more debt than their property is worth. However, in the March 2021 budget, the government has said that it will underwrite 95% mortgages from April, provided the property is under £600,000. From the information currently available, this will be similar to the Help to Buy mortgage guarantee scheme (which closed in 2016). Due to the government taking on more of the risk, there is widespread expectation that we will likely see an increase in 95% mortgage products offered by lenders in the coming months.
Implications for borrowers
At the time of writing, lenders allow you to borrow up to 4.5 times your annual salary.
For first time buyers, the average property value in February was £200,692. In this case, a 5% deposit would be £10,035 and a 10% deposit £20,069. For the former, this would require borrowing £190,657, which would require an annual household income of at least £42,368. For most first time buyers, this may be a stretch, unless you are buying a property with your partner/spouse who also earns an income.
In short, many single people who might consider the government’s scheme will struggle to meet lenders’ criteria on their own. For couples, however, it could be a more realistic option. If you are a lower income earner but have a larger deposit (e.g. over 25%) you may see little use for the scheme.
Those with a higher income could benefit more if they have little/no deposit saved, since they could more realistically afford higher monthly mortgage repayments.
There is also likely to be a regional dimension to the 95% mortgage guarantee. After all, buyers in London may not be able to meet the 4.5 threshold due to disproportionately high property values. People in the North of England, however, where the property values are generally lower may find the government’s scheme more useful.
The importance of financial planning
For most people, your mortgage is likely to be your biggest monthly expense for at least two decades. It is important, therefore, to make sure that this integrates wisely into your wider financial plan.
For some people it may be wiser to build up a bigger deposit than settle for a product where high monthly repayments could leave little room for pension contributions, investments or building a short-term emergency fund.
Bear in mind that, even with the government shouldering some of the risk, banks which offer 95% mortgages in the coming months are likely to set higher rates. Affordability tests that lenders place on borrowers may also change, and the Bank of England may also impose regulatory adjustments.
Invitation
If you would like to discuss your mortgage options, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.