When the chancellor, Rishi Sunak, announced his budget on Wednesday, he talked about the government’s goal of turning generation rent into “generation buy”. The measures he outlined to help would-be homebuyers had been heavily trailed – an extension to the stamp duty holiday he launched last year for England and Northern Ireland, and a new UK scheme to bring back 95% mortgages. But the budget documents brought more detail. We have looked at the small print to see what the measures will mean for homebuyers.
How will the 95% mortgage scheme work?
The coronavirus pandemic has led to the virtual disappearance of mortgages that only require a 5% deposit – there were only five 95% loan-to-value (LTV) mortgage products available last month compared with 391 in March 2020, and those were specialist deals, according to the financial data provider Moneyfacts.
The initiative aims to encourage banks and building societies to offer 95% mortgages again. It will do this by giving them the chance to buy a guarantee on the portion of the mortgage between 80% and 95%. If a borrower gets into financial difficulty and their property is repossessed, the government will cover that chunk of the lender’s losses.
The scheme will open for new mortgage applications in April and run until the end of 2022.
Several of the country’s largest lenders, including Lloyds, NatWest, Santander, Barclays and HSBC, will be offering these 95% mortgages from next month, with others including Virgin Money due to follow shortly after.
Who will be eligible ?
This scheme is for any “creditworthy” household struggling to save for a higher deposit. These will be standard residential mortgages – so no second homes or buy-to-lets – and the property has to cost £600,000 or less.
The mortgages must be on a repayment basis, not interest-only. And borrowers will need to be credit checked and meet the standard rules on affordability.
What will the interest rates on these deals be like?
We don’t know yet but experts are predicting they will come in at below 4%.
Miles Robinson, the head of mortgages at the online mortgage broker Trussle, says: “At the moment, 90% LTV mortgage rates are 3% to 3.5%, so we could expect 95% LTV mortgage rates to be between 3.5% to 4%. However, there’s the potential that lenders will adjust 90% LTV rates as well as launching 95% LTV deals, so we could see slightly lower deals coming through.”
Nick Morrey, the product technical manager at the broker John Charcol, says: “I would expect the 95% products to range from 3.49% to 3.99%, with some going over, depending on length – for example, five-year fixed rates without a product fee.”
As part of the scheme, the government has told lenders they must offer a five-year fixed-rate deal so borrowers can lock their repayments at a set level for the medium term.
What is happening with stamp duty?
The temporary stamp duty holiday is being extended in England and Northern Ireland. Until 30 June, the first £500,000 spent on a property will be tax-free, which means a saving of up to £15,000. After that, the threshold will drop to £250,000 until 30 September. It will then return to its normal level of £125,000. However, first-time buyers have a separate threshold, set at £300,000, and that will come back into play after June.
The first cut will have an impact on first-time buyers who are spending more than £300,000, and all other homebuyers.
For an existing homeowner planning to pay £450,000 for their new home, moving in before the end of June will mean a saving of £12,500 over the standard cost. If they complete in July, they will pay £10,000 – a saving of £2,500. It is still worth having but probably not enough incentive to try to start a new purchase to complete before the end of September.
For a mover, buying a home for £250,000, there is no duty now but also no need to rush to complete before the end of June. Completing by the end of September will mean a £2,500 saving.
In Wales, the holiday is on the value up to £250,000, and that has also been extended until the end of June. In Scotland, the temporary threshold of £250,000 will end on 31 March.
Should I try to buy now to beat the change?
Unless you are a cash buyer, it’s unlikely that you can find somewhere now and complete before the June deadline – those pushing for the extension were arguing it was needed because of the big backlog of purchases in the system.
Ray Harriot, the CEO and founder of Reliable Property Group, which helps buyers with conveyancing, surveys and mortgages, says when the backlog is combined with “the UK’s fairly archaic homebuying system … June suddenly doesn’t look that far away”.
He says buyers should “now focus on their own timeline and avoid being fast-tracked into deals by overeager sellers on a deadline, as this pressure may force them to cut corners”.
Will the changes help buyers?
While the measures will help some people on to the housing ladder, Neal Hudson, a housing market analyst at BuiltPlace, says the packet of measures “is clearly about supporting the market rather than a group of individuals”. He points to the fact that the holiday has been stepped down, rather than the government opting just to extend it for people who are already in the system and may have just missed out. “Also, it continues to apply to investors and second home buyers, while at the same time they are talking about helping generation rent.”
Hudson says the 95% mortgage guarantee will offer lenders confidence to reintroduce those deals but not many buyers will benefit. “A 95% mortgage is no help in London and other expensive parts of the country because you bump up against the affordability tests. It will really be most help in the Midlands and the north.”
And supporting the market means that prices are unlikely to fall – in the short-term at least. “All of this is pointing to a continued strong housing market for the rest of the year – but there is a lot of risk out there: people are still on furlough or losing their jobs,” he says. If you are struggling to keep up with rising prices, the new measures could make matters worse rather than better.
Case study: ‘It’s just a massive weight off our shoulders’
Bess Browning and her partner, Bobby Dolan, were delighted to hear Rishi Sunak confirm that he was extending the stamp duty holiday until the end of June.
“It’s absolutely fantastic for us – it’s just a massive weight off our shoulders,” says Browning, 29. She and her partner are in the final stages of buying a two-bedroom terrace house, and paying no stamp duty means a saving of £11,000.
The couple sped up their search for a new home because of the stamp duty incentive.
We’re right at the end of the process – our mortgage offer has been released and the solicitors have done everything
They found a property they liked in Faversham in Kent, and had their £370,000 offer accepted last October. At the time of the offer, they were told the transaction would take approximately 16 weeks.
Browning works as a journalist on women’s magazines, while Dolan, 30, is a secondary school teacher.
This is the first property that the couple – who are currently renting – have bought together. Browning already owns a flat in Faversham that she rents out.
“We’re actually getting worried,” Browning said a few days before the announcement. “We’re right at the end of the process – our mortgage offer has been released and the solicitors have done everything they need to do. [But] everything just seems to be taking a lot longer – it’s quite frustrating.”
She was not sure what they would do if they ended up facing an unexpected stamp duty bill. “Eleven grand is so much money … We would have to borrow it.”
The chancellor’s move should give them time to do all of the paperwork they need to for the purchase. Announcing the extension, Sunak said: “Due to the sheer volume of transactions we’re seeing, many new purchases won’t complete in time for the end of March.”
Speaking after they got the news that they have three more months to complete and still benefit from the tax break, Browning says: “We’re towards the end but we’re still not there yet.”
They had seen all the speculation in the days running up to the budget regarding a possible extension but did not want to assume that it was a done deal. “Now we don’t have to worry,” she says.