Posted on Monday, November 2, 2020
Earlier this month, the Prime Minister Boris Johnson pledged to fix the ‘broken’ housing market and ‘turn generation rent into generation buy’.
In a speech to the virtual Conservative Party conference, he said the government has plans to increase the availability of long-deposit mortgages for first-time buyers.
According to Johnson, the initiative would add two million owner-occupiers to the housing market and fulfil one of the Conservative Party’s key promises from the 2019 election.
He said: “The disgraceful truth is that home ownership levels in this country have plummeted and that many are forced to pay through the nose to rent a home they can’t truly love or make their own.”
“This policy will create two million more owner-occupiers – the biggest expansion since the 1980s of home ownership, to every part of the country.”
Currently, borrowers have to undergo stringent affordability tests when applying for a mortgage. However, the criteria could be relaxed under the new plans, encouraging more first-time buyers to the property market, subsequently boosting the market for property sellers.
While the proposals have been welcomed by most, the financial sector has warned against irresponsible lending which could cause long-term economic issues.
How does a 95% mortgage work?
A 95% mortgage enables buyers to borrow up to 95% of the purchase price of their desired property, meaning they put down a 5% deposit to cover the rest.
This form of arrangement will sometimes be referred to as a 95% loan-to-value mortgage (LTV).
The idea of a 95% mortgage is to allow more people to buy and get on the property ladder sooner as they won’t need to save as much money.
As an example, someone wishing to buy a house worth £200,000 with a 95% mortgage would put down £10,000 of their own money and borrow the remaining £190,000.
Due to the increased level of lending, 95% mortgages usually come with higher interest rates, with buyers who pay a deposit of 40% or higher benefitting from the most favourable rates.
The coronavirus pandemic has caused mortgage lenders to be more wary with the products they offer, resulting in a drop-off in the number of high LTV mortgages available to first-time buyers.
Moneyfacts reported a 93% fall in the number of mortgage deals at 90% LTV or higher between September 2019 and the same month this year.
But the government is hoping that its pledge will encourage lenders to start lending more to those purchasing a home for the first time.
It is unknown whether the government is planning to guarantee higher risk loans or how long the length of the increased number of 95% mortgages would be, but more details will be made in the coming months.
Why is this good news for buyers and sellers?
Although increased lending like this should be treated with caution, particularly during a global pandemic, more 95% mortgages could provide a much-needed boost for the property market.
There is an obvious benefit for first-time buyers, who can enter the property market without having to save as much money. This, coupled with the stamp duty holiday, means they are in an even better position to fulfil their dream of stepping on to the property ladder much sooner.
This has knock-on benefits for the sales market. If more buyers are interested in a seller’s property, the chances of selling quickly and for the best possible price are increased.
As we approach the winter period, now remains a very good time to sell as prospective buyers are boosted by the 95% mortgage news and are still eager to take advantage of the stamp duty holiday. They will also be keen to move into their next home before Christmas and the New Year.
If you’re considering selling your property, we offer a free and instant online valuation to give you an estimate on your property price in the current market.