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?

My first property was bought with a 100% mortgage, back in 1999,

But the 90s were a very different time for property.

@Bloodyhamabeads

*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 😢.

Yes I agree with this. I can see how the return of 5% deposits will be beneficial for some people, but being brutally honest they’re not the people most in need of help to have secure housing. High earners with low salaries will likely be able to weather any economic changes and are more likely to have flexible, professional roles, meaning more financial flexibility in general. Low earners in expensive cities will be in exactly the same position as they are now. A cap on house price increases would be more effective. It’s one area of the economy that doesn’t need stimulating

I know it would impact some but I would like to see higher interest rates. Better for savings & would probably reduce prices.

@lolulop

My first property was bought with a 100% mortgage, back in 1999,

But the 90s were a very different time for property.

True - however posters are saying how much the 95% would/has assisted in more recent years.

I don't disagree it won't help some but I still think lower prices will be far more beneficial.

@lolulop

I know it would impact some but I would like to see higher interest rates. Better for savings & would probably reduce prices.

Agree, That’s the tricky balance to achieve isn’t it, I receive very, very little on my savings, quite frustrating.

I don't think I've ever had the option to make money on savings. I finished uni in the early 00s & it took a few yrs to not be on the breadline & then 08 hit.

We are long term renters and push came to shove could come up with just under 100k. Deposits not the issue. It’s the amount we can borrow that’s the problem.

I don’t quite know what the answer for that is though, I just don’t know how I am capable of earning 100k a year with zero qualifications. Or how to get the qualifications to earn that

@NoSquirrels

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 got a 5% deposit mortgage in 2014.

We sold the house and put 10% down on the next one.

They abolished 5% deposits and increased to 10% minimum after the 2008 crash when so many people were in negative equity.

5% deposit mortgages were common place right up until March 2020 when lockdown came, they were only unavailable temporarily after the crash, they were not like 100-110% mortgages that were never seen again.

@BernadetteRostankowskiWolowitz

We got a a mortgage with a 5% deposit in 2008. Lived in the property 10 years. When we sold, we were then in a position to put down a 20% deposit on our next place.

I dont see the problem with 5% deposit?

Yes same.

We used a 5% deposit (about £8500) to buy our first house 6 years ago. We could have used a slightly higher deposit but going down to 5% meant money left over to do decorating and didn’t make much of a difference to the monthly payments.

The LTV made mortgage options quite slim but we did an initial 18 month term with a relatively high monthly payment and subsequently remortgaged twice and paid far less thereafter (about half), each time benefitting from slightly increased market value.

@user88899

They abolished 5% deposits and increased to 10% minimum after the 2008 crash when so many people were in negative equity.

5% deposit mortgages were common place right up until March 2020 when lockdown came, they were only unavailable temporarily after the crash, they were not like 100-110% mortgages that were never seen again.

I agree with the above, I know many people who used 100-110% mortgages in their 20s (so around 15 yrs ago now, all professionals like medics/law etc for the 110% mortgages)

5% deposit was pretty standard for FTB 10-15 years ago - it works well in a rising market. Risky now in a more uncertain time, but if it helps people into 1st time property the trade off is that you might be able to get into a property, but then sitting in it for a long time (10 yrs or so). Still, I 'd rather that than rent personallly

I can see why govt encourages home ownership:

• less pressure on social housing
• we build up equity which can get taken away to pay for care homes later on
• stamp duty reform removes barrier to moving
• moving home stimulates economy (keeps lawyers, EAs, tradespeople in jobs, plus all the spend on furnishing/DIY etc)

My impression is that this is something that will be very beneficial somewhere like London but perhaps not elsewhere.

@sum1980 what gives you that impression? Why wouldn't it be useful elsewhere?

@user88899 well in London the classic situation is a couple - joint family income say a 100k but no savings because life is expensive and rents are high. They have the salaries but might not be able to actually save a deposit. Starter homes elsewhere are much much cheaper so a couple might be able to save say 20k or whatever a 10% deposit is going to be.

Not sure it's helpful for London. I think it could be ok for younger buyers to help them skip a stage & buy a house as opposed to flat. Because in this climate you need longer to build up equity however 600k won't get you that much of a house.

@sum1980 I'm not sure why you think anywhere else is any different, people are in a rent traps all over the country, plenty of people struggle to get a deposit despite good incomes that could pay mortgage payments, usually due to cost of rent and possibly childcare too. Whilst it might be more acute in London with higher prices I very much disagree with the sentiment it's only useful to London, I say that as someone who was only able to buy with a 5% deposit and that wasn't London. The withdrawal of 95% LTV mortgages stalled buyers all over the country last year.

@user88899 I think you are probably right. I was mainly thinking that the government especially cares about helping/fuelling the South East which just annoys me somewhat. I mean - I definitely think that houses should be more affordable in general

We bought in 2014 with a 95% mortgage. Due to our low deposit the interest rate was 4.99% so our mortgage cost us more than we’d been paying in rent for the first 2 years. But after that we remortgaged and the rate dropped to 2. something so it then went to being cheaper than renting. Still in the same house and I don’t think we’d have been able to buy for quite a few more years without the 95% mortgage.

A lower % deposit really helps in Scotland under the ‘offers over’ system. It means buyers (esp. FTBs) can use a chunk of their savings to cover the amount paid over the Home Report value.

High earners with low salaries will likely be able to weather any economic changes and are more likely to have flexible, professional roles, meaning more financial flexibility in general.

Who are "high earners with low salaries"?

We bought 4 years ago with a 95% LTV (there were multiple available at the time) mortgage, then sold and bought a house double the value of the first one with an 85% LTV. The difference in our position now vs then is huge and we would not be where we are without the first higher LTV mortgage. FWIW one of us was training at the time and the other one climbing the ladder, we weren't cash rich or high earners and it was extremely helpful to be able to buy. However, I agree that this is likely to help couples/young families/joint purchasers more than sole purchasers. I think the issue is that the latter are often completely priced out to begin with, for some their salaries are too low to buy full stop, but that's a separate issue to tackle. I would not dismiss the 95% mortgages for that reason.

I'm afraid I have quite a cynical view of this new offer, especially with regards the current buildings safety/leaseholder scandal.

While the 5% deposit might be a boon for some, it's important to note that a lot of the first-buyer homes are currently affected by the cladding crisis. Unless the government helps resolve this soon, a whole tranche of properties - largely flats - will be off the market for the foreseeable, so the 5% deposit will be of little use.

This is being brought back to parliament tomorrow - if concessions are made for those leaseholders, I will be behind the 5% deposit scheme much more firmly.

I actually really like Rishi. I think he has pulled a blinder through this crisis. So I trust he knows what hes doing.

[quote sum1980]@user88899 well in London the classic situation is a couple - joint family income say a 100k but no savings because life is expensive and rents are high. They have the salaries but might not be able to actually save a deposit. Starter homes elsewhere are much much cheaper so a couple might be able to save say 20k or whatever a 10% deposit is going to be.[/quote]
It would be a lot more helpful for this couple on 100k combined if the price were to fall by 50% rather than let them borrow on an 95% LTV to their eyeballs to probably buy a badly built Barratt poky 3 bed on a backend of Cannington or near an industrial estate in zone 4 for what these 500k will get you in London.

This is a huge deal for us. We're about to start saving for a mortgage deposit as we drop childcare fees, and we're currently looking at 4 years to save up enough for a deposit. In the meantime we're living in a cold, damp rented flat.

If we can halve the time it takes to save up a deposit and be able to buy in 2 years time, it makes a big difference to our lives. Our household income is good and we can very easily afford to pay off a mortgage each month, it's getting the deposit together while we pay rent that is stopping us buying sooner.

I think a lot of people are in a similar position, easily able to pass affordability checks, but with housing prices and deposits so high right now, it's very difficult to save up while renting.