Government pledges 95% mortgages for two million first-time buyers – how will they work?

The government is likely to make 95% mortgages extensively available to first-time buyers, but questions remain over how the proposals would work used.

The Pm states that two million prospective first-time buyers can afford mortgage repayments but they are struggling to get approval for any home loan and believes unlocking more low-deposit loans will create ‘the biggest expansion of owning a home since the 1980s’.

Here, Which? explains how the plans could work and outlines the down sides facing first-time buyers who have seen their mortgage options dry up in 2021.

What has the Pm pledged?

Speaking at the Conservative party conference last week, the Prime Minister said he wants to ‘turn generation rent into generation buy’.

His proposals involve unlocking long-term fixed-rate 95% mortgages, at a time when low-deposit loans have disappeared within the wake of the coronavirus outbreak.

With lenders having withdrawn most of their 90% and 95% mortgages, first-time buyers face the prospect of needing a 15% deposit to get to the property ladder.

How would the proposals work?

The government is yet to provide information on the way it plans to make mortgages more readily available, however it may need changes to current regulations or direct intervention.

Rules introduced after the financial crash of 2008 limit the amount of high loan-to-value mortgages lenders can provide to customers.

When are applying for your a mortgage, you’ll usually be permitted to borrow a maximum of four-and-a-half times your annual income, and the Bank of England’s regulations mean lenders are only able to offer 15% of their loans only at that level or higher.

Theoretically, these rules and other affordability measures could be relaxed to allow buyers with smaller deposits to borrow more, but mortgage brokers would be unwilling to take on the additional risk, especially at a time of economic uncertainty.

One alternative would be for that government to be sure the loans, meaning it might be responsible if borrowers default, a process similar to the Help to Buy mortgage guarantee scheme that closed in December 2021.

The other unanswered question is in which the new swathe of buyers will live. Recently, the number of new homes being built has been propped up by the Assistance to Buy equity loan scheme, but stricter rules are set to come into force from next April and the scheme will end completely in 2023.

95% mortgages and house deposits

As we mentioned earlier, banks have slashed their 90% and 95% mortgages since the start of the COVID-19 pandemic, with nine in 10 deals being taken off the market.

Those that have remained for sale have grown to be harder to obtain, with lenders limiting terms, capping lending amounts, and blocking buyers of flats and new-build homes from applying. Some banks have even launched ‘flash sales’ lasting 24 or Two days to deal with demand.

The removal of low-deposit mortgages is important for first-time buyers because it means they’ll need a much larger deposit to purchase a home.

85% mortgages continue to be accessible, but many buyers will be priced out by the requirement for a larger down payment. If you buy a home at the average first-time buyer price in England (lb213,000), you’ll require a deposit of lb31,950 to get an 85% mortgage, in contrast to lb10,650 to get a 95% deal.

How much deposit will you have to get a mortgage?

95% mortgages and negative equity

95% mortgages really are a hot topic because they unlock home ownership for cash-strapped first-time buyers, but they also come with higher rates and significant risks inside a volatile housing market.

Right now, the property market is on the rise, using the government’s temporary stamp duty cut leading to soaring demand and rising prices.

But that may be short-lived. Property experts have suggested that house prices could fall in 2021 following a end from the stamp duty holiday, which could leave individuals who buy homes having a 95% mortgage vulnerable to negative equity – when the house is worth less than the total amount they owe around the mortgage.

Best rates on low-deposit mortgages

It’s not currently possible to get a 95% fixed-rate mortgage with no guarantor, but you may still find a number of 90% mortgages on offer – albeit with the aforementioned restrictions in place.

The tables below show the cheapest 85% and 90% fixed-rate deals open to first-time buyers, based on our analysis of information from Moneyfacts.

85% mortgages (151 deals available)

90% mortgages (23 deals available)

First-time buyers and also the 'bank of mum and dad'

The struggles facing first-time buyers happen to be highlighted by a new report from the Legal & General, which shows the degree that they depend on the ‘bank of mum and dad’.

The insurer says 56% of under-35s get help from their parents when buying a home, with parents playing an active role in more than 73,000 purchases this year.

The report says parents lend or gift typically lb19,000 to buyers younger than 35, which 71% of these who’ve benefited say they wouldn’t happen to be able to get to the property ladder without the assistance.

Advice for first-time buyers

If you’re looking to buy the first home this year, we’re here to assist.

As a starting point, check out our step-by-step guide on purchasing a house, which takes all of you the way in which from saving for a deposit to switch and completion.

If you’re struggling to get a handle on how mortgages work, we’ve got plenty of suggestions about the kinds of mortgages, what you can borrow and how to boost your likelihood of being qualified.

Finally, why not check out our newly released mortgage lender reviews for 2021, which combine customer ratings with our expert deal analysis to identify the UK’s best mortgage brokers.