95% mortgages

RyanT1992

K_S said:

RyanT1992 said:

Hi all,
We’re deciding whether to use the new 5% deposit government scheme to buy, or whether to save for an extra 9-12 months to get a 10% deposit. 
Can anyone give us advice? Assumptions I’ve made (please correct where possible) 

- We won’t be able to borrow as much on 5% as 10%
- Our chances of getting 4.5x our salary on 5% deposit are incredibly low 
Also interest calculators are fairly useful but obviously without going through the process, it’s not tailored to you - but how much roughly extra interest would you look to pay with a 5% deposit in comparison to a 10% deposit?
House cost would be somewhere between 350-450k
That’s what we want to establish, as to whether it’s worth saving for another year (we’ve been saving for many already).
I’ve always been told to not go for a 5% deposit and I’ve got massive reservations about the overall effectiveness of these government schemes, but I’ve got to the point where I wonder whether it’s worth going for a 10% mortgage over 5% now some banks should be lending at that rate. 
Thanks in advance to anyone who can help!

@ryant1992

- Obviously this is an educated guess but I wouldn't expect a huge restiction in LTI caps at 95% compared to the already tight limits at 90% currently.

- Impossible to say until we see a few products coming out whether it'll be 4.5x or less. Also depends on your affordability numbers - income, commitments, debt.

- Interest rate premium is again guesswork. In the early days of the last version of H2B mortgage guarantee 95% products, the jump from 90%-95% products was (very very crudely) about 1%. That may or may not be the case this time.

K_S said:

Getting_greyer said:

It's interesting as if someone has 10% deposit.  What would the rate difference be between a normal mortgage of 90% and one of 95% where the government guarantees say 20% of it.  Hypothetical of course. 

@Getting_greyer Looking back at the early days of the H2B mortgage guarantee scheme in 2014, it looks like the 95% LTV mainstream no-fee 2yr rates were between 5-5.5%, 90% LTV around 1% lower and 85% LTV a further ~0.75% less. This is a very crude comparison of course.

- It's important to remember that (to the borrower) these low deposit mortgages aren't "government" mortgages/schemes per se, rather they are just 95% products offered by lenders, that's it. It isn't comparable to the H2B equity loan.

Only you can make the assessment whether to wait for a 10% deposit or try for the 95% products when they come out.

Cheers for that info, really helpful. It seems there’s not a lot of detail been released and I guess it’ll depend on how many banks actually take up the scheme and offer it, for competitiveness. I was just trying to establish whether I could buy the same house with a 5% deposit as I could with a 10% deposit, whilst not paying an obscene amount more a month in mortgage repayments/interest. I reckon I’d accept £200 a month extra, but any more & I may be tempted to save up for another year. It’s a tricky one to work out! 

RyanT1992

James-may said:

In a similar situation myself in that I'm saving for a deposit, and will have 5% by may, but will take til Oct, possibly Jan before I get to 10%.
In that time I will have paid £4k in rent, not to mention the possibility that house prices rise.
Be great if actual details and stuff were released.

Yeah agreed, it’s not as simple as saying ‘’just save up for a bit longer for that 10% deposit’’ - this 5% deposit isn’t perfect but if you’re desperate to move out, it could work

Thrugelmir

ukri said:

Thrugelmir said:

Interest rates for 95% mortgages will remain at commercial levels. No risk reduction involved. As the lender will pass part of this back to the Government for participation in the scheme. The guarantee will be funded. Not borne by the taxpayer. The aim of the scheme is to support the housing market by helping low deposit buyers get onto the first rung of the ladder, not provide cheap finance. 

Did anyone say it’ll be “cheap finance”?

The OP asked how much MORE the interest rate would be compared to 90%. Another poster quantified that in relation to what happen the last time saying it was HIGHER by about 1%.

you are literally the only person on this thread making any suggestion of cheap finance.

You mentioned cheap finance more times than I did.  Which also makes you the second person on this thread to mention it. For no purpose than to rant I'd suggest. Why make an issue out of a non issue with a pointless comment? 

K_S

Thrugelmir said:

Interest rates for 95% mortgages will remain at commercial levels. No risk reduction involved. As the lender will pass part of this back to the Government for participation in the scheme. The guarantee will be funded. Not borne by the taxpayer. 

Genuine question @Thrugelmir , if the lending will be at "commercial rates", and the taxpayer/government takes on no additional risk through this scheme, then why aren't there any 95% products in the market now? What is the lender getting from the government in exchange for the participation fee? 

Isn't it that right now lenders aren't willing to lend at 95% because the risk of repo is too high so it doesn't make commercial sense for them to offer products. The government, through the H2B mortgage guarantee, is offering them a form of insurance to guarantee part of their potential loss in the event of a repo which brings down the risk enough so that lenders can offer 95% products. At least that's how it was explained to us mortgage advisor laypersons in an industry webinar I attended today.

Thrugelmir

K_S said:

Thrugelmir said:

Interest rates for 95% mortgages will remain at commercial levels. No risk reduction involved. As the lender will pass part of this back to the Government for participation in the scheme. The guarantee will be funded. Not borne by the taxpayer. 

Genuine question @Thrugelmir , if the lending will be at "commercial rates", and the taxpayer/government takes on no additional risk through this scheme, then why aren't there any 95% products in the market now? What is the lender getting from the government in exchange for the participation fee? 

In effect this tranche of 95% mortgages will be a pooled risk across all the participating lenders. Some clever bods in the Treasury will have modelled the risk exposure i.e. the potential level of default and priced the levy accordingly.  Of course they may have got it wrong. Though the broader impact will be as with most political actions is to create economic activity and therefore generate tax revenues. Which makes the policy cost neutral at worst. The scheme also boosts confidence and underpins the pyramid structure of the housing market. Without those entering onto the first rung those above eventually find themselves stuck. 

As a commercial lender why take the risk of losing money at all when you've no need to.  Bankers hate uncertainty, which at the moment we have in bucket loads. Mortgage books are built top down in a very structured and defined manner by the risk management team. The tranche of money allocated to a particular product at a given LTV and interest rate is part of a clearly defined board level approved plan. Lenders generally were internally forecasting (as in late 2020) a slight fall in property prices this year. 5% equity obviously provides little security.  As when a mortgage holder defaults not just the outstanding mortgage balance to be considered, but the administrative collection costs which in themselves mount up. 

clueless_but_curious

K_S said:

Thrugelmir said:

Interest rates for 95% mortgages will remain at commercial levels. No risk reduction involved. As the lender will pass part of this back to the Government for participation in the scheme. The guarantee will be funded. Not borne by the taxpayer. 

Genuine question @Thrugelmir , if the lending will be at "commercial rates", and the taxpayer/government takes on no additional risk through this scheme, then why aren't there any 95% products in the market now? What is the lender getting from the government in exchange for the participation fee? 

Isn't it that right now lenders aren't willing to lend at 95% because the risk of repo is too high so it doesn't make commercial sense for them to offer products. The government, through the H2B mortgage guarantee, is offering them a form of insurance to guarantee part of their potential loss in the event of a repo which brings down the risk enough so that lenders can offer 95% products. At least that's how it was explained to us mortgage advisor laypersons in an industry webinar I attended today.

FA2021 bill hasn't gone through parliament yet

K_S

@Thrugelmir Ok, so the lenders now have a bit more security than they did, thanks to the H2B mortgage guarantee scheme, and this helps them offer 95% products which they couldn't/wouldn't do without this scheme. Is that fairly accurate?

lspell1

This provides the basics K_S: https://ukmortgageadvisors.co.uk/blog/help-to-buy-mortgage-guarantee-scheme-2021/
There’s a greater risk of borrowers defaulting at the moment, and lending at 95% risks the lender not getting all of their money back if they need to gain repossession. The government guarantee helps mitigate some of the risk.

K_S

lspell1 said:

This provides the basics K_S: https://ukmortgageadvisors.co.uk/blog/help-to-buy-mortgage-guarantee-scheme-2021/
There’s a greater risk of borrowers defaulting at the moment, and lending at 95% risks the lender not getting all of their money back if they need to gain repossession. The government guarantee helps mitigate some of the risk.

@lspell1 Thanks. That was my understanding as well. I was just a bit confused by what @Thrugelmir said.

Thankfully, all that my prospective clients want to know are the rates and criteria and they seem pretty happy about the govt guarantee enabling lenders to come back into 95%. Anyway, it's not too long until the first products come out.

lonibra

K_S said:

Thrugelmir said:

Interest rates for 95% mortgages will remain at commercial levels. No risk reduction involved. As the lender will pass part of this back to the Government for participation in the scheme. The guarantee will be funded. Not borne by the taxpayer. 

Isn't it that right now lenders aren't willing to lend at 95% because the risk of repo is too high so it doesn't make commercial sense for them to offer products. The government, through the H2B mortgage guarantee, is offering them a form of insurance to guarantee part of their potential loss in the event of a repo which brings down the risk enough so that lenders can offer 95% products.

That is spot on. Bottom line, but for the government's mortgage guarantee, there would not be any 5% deposit mortgages in a few weeks. Simples.