Since the credit crunch mortgage lenders have generally been reserving their mortgage products for those with a 25% deposit or more. As a result many potential first time buyers or even next time buyers feel resigned to never moving on or up the property ladder due to having what is now perceived as a low deposit.
So far in 2011, there has been a gentle shift amongst some lenders towards offering products based on a 10% deposit or less and currently 3 providers now offer products with a zero deposit from the client. Getting a 95% to 100% mortgage though is by no means easy, however, as not only will lenders apply stringent lending criteria but most of them require some form of guarantor or collateral charge over another asset, typically a parents own property or savings. This ensures that in the result of the applicants defaulting on their own mortgage, the lender can potentially mitigate any loss they incur by requesting the parents are responsible for any loss incurred by the lender.
Therefore as an example, if the first time buyer bought a property for £150,000 and put a 5% deposit down, they would be left with a mortgage for £142,500. Let’s assume property prices then drop 10% and the client(s) lose their job or suffer a drop in income resulting in the property being repossessed. If the lender is only able to sell the property for £135,000 that means they are still owed £7,500 (the difference between the mortgage and the sale price). If the clients are then unable to clear the mortgage debt owed, the lender can then seek to reclaim these funds from the parents. Many parents may understandably feel uncomfortable in using their own assets as collateral to help their children but this is one innovative way to help a weak mortgage market where first time buyers remain scarce.
There also continue to be Government assisted options available to support first time buyers and an interesting new scheme for 2011 is the First Buy Scheme run by the Government and the house builder Taylor Wimpey. This is only applicable for first time buyers wishing to buy a new build property but it allows clients with only a 5% deposit to then take 20% of the purchase price as a loan from the Government / Taylor Wimpey and no interest is due on the20% loan for the initial 5 years. This in turn then allows the applicants to get a mortgage product from a lender based on having a 25% deposit on a far more affordable rate of interest compared to a mortgage product based on only a 5% deposit.
With our economy remaining pretty flat in terms of economic growth and reasonably high inflation impacting on the cost of living, it seems reasonable to expect that house prices will struggle to make any headway over the next few years. This coupled with the government’s stance that banks and building societies must hold a certain amount in capital for every £1 they lend over 75% of a property’s value means it’s highly unlikely that there will be a huge appetite for lenders to start competing aggressively at the lower deposit end of the mortgage market. For those offering products based on a small deposit, the interest rates do tend to be quite high so affordability will become an issue especially in the future should the Bank of England start to raise interest rates. Also, by putting a small deposit down when property prices are subdued and have the potential to move lower still, there is also the added risk of being caught in negative equity.
As a result, there are many factors to consider when embarking on the property ladder. To get a full understanding of how the current first time buyer products might work for you or your family contact us today.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.