The government is considering a 1% deposit mortgage guarantee scheme for First Time Buyers. But what does this mean for those wanting to get on the property ladder?
Although not confirmed, we assume that the 1% deposit mortgage scheme will work in the same way as the existing 5% deposit scheme. Schemes like this provide a safety net provided by the government to incentivise lenders to offer more high Loan-to-Value (LTV) mortgages.
Your LTV ratio represents the proportion of your property’s value covered by the mortgage loan. In the case of a 1% deposit, your LTV loan is 99%. Lenders are likely to seek government backing for up to 15% of the loan, reducing their risk exposure in case of default. However, this would still result in lenders having increased risk which undoubtedly would result in higher interest rates for borrowers and higher monthly mortgage premiums.
Most mortgage lenders extend loans of up to 4.5 times an individual’s salary. If a first-time buyer is looking to purchase a property that costs £300,000 and chooses the 5% deposit scheme, they’ll pay a deposit of £15,000 and have a mortgage of £285,000. Should the 1% deposit mortgage scheme become reality, the first-time buyer would only pay a deposit of £3,000, however, the mortgage would have to cover the remaining £297,000 of the property value, and at a presumably increased rate.
The Pros:
If this scheme goes ahead, it could provide a solution for those stuck in the rental spiral. Many renters can afford a mortgage, however, due to high rental costs, find it difficult to save up for a deposit.
The Cons:
What happens when your 1% deposit mortgage deal ends? Currently, we have no indication, if the scheme goes ahead, whether borrowers will be required to take out a minimum mortgage term.
Risk of negative equity? You’re in negative equity when the value of your mortgage is bigger than the value of your property. According to MoneyHelper, there are approximately half a million properties in negative equity in the UK. The smaller the deposit you put down, the greater the risk of negative equity if the value of your property falls.
Reduced borrowing? First-time buyers will need to be able to borrow a big enough mortgage based on their financial circumstances.
Consider other buying costs. There are other fees you’ll need to budget for when buying a house such as conveyancing fees and the cost of a survey too. Plus you may need to pay stamp duty too.
Higher mortgage rates. The higher the risk a lender views you, the higher the mortgage rate you’ll usually pay. In other words, the less of your own money you put up as a deposit, the higher the mortgage rate the lender is likely to offer you as you’re a greater risk than someone who can pay a 5% deposit.
With any mortgage deal, but more so for first-time buyers, it’s crucial to seek professional advice.
Traditional lenders don’t know how to work with those earning a day rate rather than an annual salary. Without a monthly payslip or years of accounts, it can be a struggle to get a mortgage, especially your first. We only work with providers that understand how you work.
Your Broadbench adviser can assist you to fully understand the options available to you and will carefully consider your long-term financial goals and affordability.
Find out more about mortgages.
Speak to an expert
