New 5% mortgages - is this a major flaw in the plan?

[TedMullins]

I’m musing over the new 5% LTV deals that are going to be announced in the budget. I’m aware the small print of these mortgages hasn’t been released yet and won’t be until they’re available in April, but it struck me that unless the amount you can borrow based on salary vastly increases, these won’t make much difference to most people?

For example. Let’s say someone earns 20k and has 10k in savings. If you can borrow 4.5x salary, the bank would give them 90k. Add their 10k, and they can afford a property worth 100k. If said person only has 5k savings, will the bank lend them the extra 5k to cover the shortfall? This would be more than the standard 4.5x salary.

Going back to the 10k - thats 5% of 200k, so some people with around that amount saved may be thinking great, my budget has increased to 200k and I can get a better property. But if they earn 20k and can still only borrow 4.5x salary, they’re still not going to be able to afford it surely?

I’m thinking that either a) the amount you can borrow will be increased quite substantially to 5 or 6x salary which seems like a big risk in the current economy, or, more likely b) the only people who will actually benefit from this are those who are already decent or high earners, or live somewhere where property is extremely cheap. What do you think?

5% mortgages are not new for me. I got one when I purchased my house in 2015. It helped us get on the property ladder as we only had to save £10,000.

They work as lots of my friends did the same and 6 years later we are all still in our homes and paying them off. For first time buyers is definitely a positive.

Lots of my friends got on the housing ladder with 100% mortgages. We missed that window (relationship hadn't reached the buying a house together stage) and then took a few more years to save a deposit as 100% mortgages not an option. C'est la vie

They abolished 5% deposits and increased to 10% minimum after the 2008 crash when so many people were in negative equity. Seems like a questionable move to bring them back now when the economy is not healthy.

We bought in 2004 on a 5% mortgage and sold 10 years later so it worked for us but properties were cheaper then. It wouldn’t be possible now on the equivalent salaries and savings anyway.

We did a 5% deposit on our first home a few years ago, house was 215k so massively reduced the deposit we needed. Did the mortgage over 40years to keep payments low so we had some money to buy things for the house etc.

We had the salaries to do the 5x the salary for lending anyway, just left us with some cash

@NoSquirrels we used a5% depodit 4 years ago so they have been back for a while, they vanished again because of covid

Ah, interesting- I thought they’d gone for good. So this is just same old same old, really?

@NoSquirrels yeah it’s a non issue really. We got our 5% deposit in 2015 and they are very common with people we know up until covid.

There’s no way we could have bought without a 5% deposit option. Our mortgage is £800 a month. But rental for similar is £1400. So it’s much safer for us to be owning but we couldn’t have done it without the 5% option.

I think it is fine. It's always swings and roundabouts. We bought in the 1980s at 2% deposit and, I think 3.5x joint. We made a small profit on the first flat, lost a lot on the first house, some of our friends went into negative equity at that point, we made more on the third, made lots on the forth.

We always really stretched ourselves, and had some scary months at 15%, yes, 15%, interest rates, but you take the risk that your salary will increase and buying has always been better than renting, regardless of up and downs in the economy.

I took out a 95% mortgage as a ftb in 2016.

Was single, earning well but not able to save for 10%. Mortgage ended up cheaper than renting.

Sold recently for £38k more than I bought it for, and now I’m not single can afford a practical mansion in comparison.

We only got on the property ladder due to 95% LTV mortgage, we had a relatively good income but very small deposit. Yes we could have waited years to save, but with a 95% LTV mortgage we bought, did a 2 year fix with not a great but manageable interest rate, and by the time we came to remortgage 2 years later our house was worth more and we were able to get an 85% LTV mortgage, much better rate so we could over pay, and then only a year later we had the equity to buy a long term family home.

For those who have little deposits but good incomes and are managing to pay often higher sums of rent than they would a mortgage, small deposit mortgages are a great opportunity to get on the ladder.

And the problem with saving for years when you can't save quickly, often due to high rent, house prices can outpace savings, we knew we needed to get on ASAP.

@Bloodyhamabeads

I think the stamp duty holiday putting prices up plus the 5% deposit propping this up will create a perfect storm of putting people in negative equity if the interest prices rise and house prices fall. I actually think it’s really irresponsible of the government.

They definitely aren't doing it to help 'generation rent'. I also haven't seen any information about what guarantees the government are offering.

As above, they have put rocket fuel under the housing market with the SD holiday and are now trying to fuel again from the bottom. The problem is that house prices are far too high relative to salary but the government are determined to keep them this way.
I agree that the whole thing is incredibly irresponsible particularly considering where we are economically as a country.
All the posters saying it worked for them in the past, it doesn't follow that the same is true now in a different set of circumstances. If interest rates rise, as they will at some point, many people will be in trouble, particularly if values fall.

My dd bought a house with a 5% deposit 2 years ago for £93K. She’s moving and has just had 3 offers for over £120K. This means she will be able to either buy a house that needs work and will have the cash to do it, or buy a bigger house with a bigger deposit.

I am excited about these being available again. Like other posters we are high earners but unable to save quickly for a large deposit due to high rent and childcare costs. We missed the boat with buying in our early twenties and now we have a family need something bigger but house prices are outpacing the rate we can save.
A mortgage will be cheaper than our rent but we haven't been fortunate to have any help with a deposit and we don't work in jobs where we get bonuses etc - so it's the deposit that's the problem.
We have £22k in savings but that's not enough for a 10% deposit where we live.
So for us, this will hopefully allow us to buy sooner.

As above, they have put rocket fuel under the housing market with the SD holiday and are now trying to fuel again from the bottom. The problem is that house prices are far too high relative to salary but the government are determined to keep them this way. I agree that the whole thing is incredibly irresponsible particularly considering where we are economically as a country.
All the posters saying it worked for them in the past, it doesn't follow that the same is true now in a different set of circumstances. If interest rates rise, as they will at some point, many people will be in trouble, particularly if values fall.

Agree completely.

The housing ladder is a pyramid scheme.

If FTB are struggling to save a deposit, maybe it’s the house prices are too high - the higher the price, the higher the deposit- not the other way round. In that case maybe we need to let prices fall and find their natural level, not continue to prop them up in this way (the government, that is). Obviously that’s not great for current homeowners, particularly those who bought recently or with low deposits. I just can’t see this high price situation lasting forever. And the more we prop it up, the worse it’s going to be when it eventually does crash 😢.

Bold fail 🤦🏻‍♀️

Is it not just to stimulate the market for 95% mortgages, to increase competition amongst lenders and provide more choice to those who only have a 5% deposit?

Years ago when I was a mortgage underwriter, there was a thing called Mortgage Indemnity Guarantee for most mortgages over 70%, for which the premium was charged to the borrower (often added to the mortgage) which protected the lender if they had to repossess and didn't get back as much as was owed. Isn't this just a return to that, but with the government sponsoring the indemnity rather than the borrower paying for it?

I'm a homeowner but this is just another prop. How will the rates compare as generally the lower LTV you get better rates.
I also think this is why so many people are stuck on the ladder. Prices are stupid & so unproductive to have so much income tied up in property.

If your moving up the ladder higher prices aren't particularly helpful.

The government needs to artificially insert cash into the base of the housing ladder to prop up the great Ponzi scheme.
God forbid that new buyers can't get mortgages and the pyramid comes tumbling down.

soon it will be 35 yr mortgages as standard

My first property was bought with a 100% mortgage, back in 1999, I’d never have been able to access the property market without it at the time. My rent wouldn’t allow enough to save a deposit.

The government needs to artificially insert cash into the base of the housing ladder to prop up the great Ponzi scheme. God forbid that new buyers can't get mortgages and the pyramid comes tumbling down.

This

We have a 95% LTV mortgage that we bought 3 years ago, as we live up north there was a 10-20k difference in some areas between a 2 bed and a 3 bed semi so we managed to buy a 3 bed much sooner than we expected as along with having help to buy ISAs we only needed a 7k deposit.