Buying your first home with a small deposit
According to the Bank of England, the biggest issue for most first-time buyers is insufficient savings. Last year saw a sharp jump in the average amount of a deposit required to get a mortgage, with some people having to provide a deposit equivalent to a full year’s salary.
To help tackle this problem, the Government is introducing a new mortgage guarantee scheme until December 2022. Here Claire Wicks in the residential conveyancing team with Parnalls, looks at the latest proposal and other ways to help you buy your first home even if you only have a small deposit.
The 95 per cent mortgage guarantee scheme
During the pandemic, lenders have tended to ask for large deposits and 95 per cent mortgages have virtually disappeared. The new mortgage guarantee scheme, announced in the Spring Budget, is designed to encourage lenders to start offering higher loan-to-value mortgages.
Under the scheme, the Government will guarantee that part of your mortgage which is over 80 per cent of the purchase price, thereby making the loan less risky for the lender.
If you default on your mortgage payments, the lender may ultimately sell your property. With a 95 per cent mortgage, there is a higher risk the sale proceeds will not cover the outstanding loan if property values fall. If you cannot make up the difference, then ordinarily the lender will suffer the loss.
Under the new scheme, the Government will compensate the lender for up to 15 per cent of the original purchase price (the borrower’s deposit covering the first five per cent).
The mechanics may sound complicated, but you do not need to worry too much about them: it will be down to individual lenders to develop and administer mortgage products which meet the Government’s detailed criteria. Most major banks have already said they plan to launch 95 per cent mortgage deals, with other lenders likely to follow suit.
To benefit from the scheme, you must satisfy certain conditions as a borrower. For example, you must:
- be buying your main home, not a holiday home or a buy-to-let investment;
- be buying a property in the UK for £600,000 or less;
- borrow between 91 per cent and 95 per cent of the purchase price;
- meet standard borrowing requirements to prove you can afford the repayments; and
- take out the loan during the term of the scheme, between April 2021 and December 2022.
It is expected that first-time buyers will find it easier to secure finance for a home purchase even with a small deposit.
Some words of caution
You should always consider carefully how any funding arrangements would apply to your personal circumstances, and a 95 per cent mortgage may not be the best option for you.
A high loan-to-value mortgage generally means paying a higher rate of interest, so always shop around and take independent financial advice before signing up for a deal. The new scheme guarantees the lender against loss, not you as the borrower.
As with any mortgage, if you cannot keep up the repayments, you risk losing your home and will still have to pay your lender’s costs. So, it is vital to check you can afford the repayments even if your circumstances change or interest rates go up.
You should also think about what could happen if property prices fall in the future. With only five per cent equity in a property, you could end up in negative equity. Negative equity is when your home is worth less than your outstanding loan. Being unable to pay off your mortgage out of the sale proceeds could stop you moving home in the future. You may also find your options to remortgage reduced, leaving you having to pay a higher rate of interest.
Consider the alternatives
If you can afford it, and you think your income is stable or will increase in the future, then a 95 per cent mortgage may still be an attractive option. Even so, it is worth considering some of the alternatives.
Help to Buy
A Help to Buy equity loan is a government scheme which could help you buy a new home with as little as a five per cent deposit. Unlike the mortgage guarantee scheme, you typically only borrow 75 per cent of the purchase price from a commercial lender. The remaining 20 per cent is funded by an equity loan from the Government. You must pay this back when you sell, but the repayment would be based on 20 per cent of the sale value of your home. So, you could end up paying more, or less, than under a conventional arrangement depending on whether house prices go up or down.
Saving for a larger deposit
Saving for a larger deposit may mean delaying your home buying plans, but it could give you a wider choice of properties and mortgage products. It may also reduce the risk of negative equity. Using a Lifetime ISA could help you save towards your first home in a tax efficient way with the Government contributing up to £1,000 each year.
Shared Ownership is another affordable home ownership scheme. You buy a share in a property, usually from a housing association, and pay an adjusted rent on the rest. When you can afford it, you may buy additional shares until you own your home outright.
Help from family and friends
Sometimes parents or other family members may offer to help with a gift or loan, or by acting as guarantors. However, this type of assistance needs careful consideration so that everyone is clear on the tax and legal implications.
Buying with others
Pooling resources with a partner or a friend is another possibility, but you must agree how you will share responsibility and ownership of the property. You will also need to decide what should happen in the future, for example, if one of you wants to sell.
If you are buying a property jointly, or with help from someone else, always discuss your intentions with your solicitor. They can ensure the legal documentation protects your interests. This will allow you to enjoy your new home in the way you planned and avoid any disputes in the future.
How we can help
Buying your first home is a milestone, one of the biggest financial and emotional commitments you will ever make. So, it is important to choose a solicitor you can be confident in, someone who can give your purchase the individual attention it deserves.
We can navigate all the legal aspects of your purchase and support you on your journey to home ownership.
For further information, please contact Claire Wicks in the residential conveyancing team on 01566 772128 or email WicksC@parnalls.com.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
Valuing an estate for probate
Do I need a cohabitation agreement?
Have you had an accident involving a horse?
Planning, Construction & Development
Preparing to sell your Launceston property
The Need for Updating Wills
Debt recovery and how we can help
Claiming compensation for a serious road traffic accident
Residential Sale and Purchases
Information to gather for your probate solicitor
Accidents, Compensation & Personal Injury
What type of will do I need?
Had an Accident in Someone's Home?
Ten common debt recovery mistakes
How to choose an executor to administer your estate when you die
The ultimate personal injury and accident claim checklist
Putting your legal affairs in order
Your responsibilities when you have people working in your home
10 reasons to appoint a Personal Injury solicitor
The risks of DIY probate
Does your lawyer progress your accident claim efficiently and provide you with a personal and professional service? Can I change solicitors for my accident claim?
Why you should always use a solicitor to prepare your will
Five problems with a leasehold property
Making a will when you retire
Buying your first home with a small deposit
Site assembly for commercial development
Meeting your conveyancing solicitor, what you need to prepare
Landlords’ options for enforcing commercial tenants’ obligations
Untangling Overseas Assets
KATHERINE FLASHMAN KITSON CELEBRATING 25 YEARS AS A DIRECTOR OF PARNALLS
Do you know the difference between…
When to consider appointing a professional attorney
Should I get a cohabitation agreement?
The Right to Make Noise
Ill-health pension transfer not liable for IHT
Legal Time Limits - why so important?
Would you pay a premium for a south-facing garden?
Video-witnessed wills to be made legal
New Planning Relaxation Is Not the Whole Storey
How to minimise delays in obtaining Grant of Probate
Could you benefit from the Green Homes Grant?
A SHOCK TO THE SYSTEM: new electrical safety regulations for residential tenancies
Property of Cornish residents who die without a will goes to Prince Charles
What effect could the new changes to stamp duty have on property sales?
Staying safer in video meetings
Making Sure Your Great New Home Comes With Clean Air
Property Market Re-Opens in England
Coronavirus: Wills and Powers of Attorney FAQ
Medical Care Received Not Up to Scratch?
Accident or Injury Involving a Dog?
Social Distancing No Obstacle for Parnall's Mobile Document Signing Team
Coronavirus (COVID-19) and Commercial Property Legal FAQs
Rent Charge Suspensions: Protecting Your Interests
Been Asked to Sign an Employment Settlement Agreement? Seek Advice Urgently...
Services Update: Continuity of Legal Service Provision
Advising You in Uncertain Times
Could carelessness on social media land you in court?
Is an electronic signature on a commercial property document acceptable?
What happens when there is no health & care LPA in place
Social Media Training for Businesses
Gazundering, what it is and how to avoid it
Relief from forfeiture – what happens if the tenant forgets to pay the rent?
Not so safe at work - compensation for an accident at work
New organ donation law: giving you control
Running a business from home
Have nude photos of you or your teenager been posted online?
Landowners’ rights and the Electronic Communications Code
Building in your back garden
Christmas is a time for giving (and inheritance planning)
Buying the freehold of your leasehold house
Redeveloping an empty pub for commercial use
Why it takes time to obtain the Grant of Probate
Social Media: The unconscious privacy threat
Is your reputation being threatened?
Making a will after your spouse or partner has died
Interns celebrate completion of internship at solicitors
Selling your home in a flat market, some top tips
New Media and Communications Court list reflects surge in internet defamation claims by Laura Baglow
Has your personal information been shared without your permission?
Planning your escape to the country, what you need to consider – part 2
Government consultation on new national model for shared ownership
Choosing a partnership structure
Planning for what happens when you die by Deborah Adams
Changes to legislation could offer protection for tenants in the private rental sector
Move to the country - Part One
Will your septic tank still be legal in January?
The death knell for ‘kiss and tell’?
Selling your property at auction
Not looking so good - your guide to compensation for botched non-surgical cosmetic procedures
New threshold of seriousness in defamation proceedings
Legal considerations when building a granny annex
Choosing the right person for your power of attorney
Formal Interviews - Do you need legal representation?
Privacy rights and aerial images
Trustees’ duty to give information to beneficiaries
Taking your first commercial lease
Is your organisation protected from employee social media legal risk?
Have you been targeted by negative social media posts?
Farmers be alert when being inspected
Help for House Sellers?
Don’t let your digital assets end up in a digital grave
Development proposals and your local authority search
What can you do if your child is injured in a serious accident
NetRights welcomes new protection for social media users
SHOULD I GET A LAWYER FOR A SPEEDING OFFENCE?
Supreme Court recognises that social media is a “casual medium” in libel battle
Choosing the best conveyancer who is right for you
Making a will after a second or subsequent marriage
Option or promotion agreement – which is best for landowners?
Anonymous pub and restaurant online reviews leave a bad taste
Help to Buy – beware of some cracks in the structure
Understanding Lasting Powers of Attorney
Changes to Energy Performance Certificate for Landlords
Had a cycling accident? Your route to obtaining compensation
New year, new home: tips to sell your home in the New Year
Tax Planning for your inheritance
Hearing loss: when your employer may be liable
Buying a home for your retirement, five things you need to consider
Farmers plan to diversify after Brexit
Ministers press ahead with probate fee shake-up - reports BBC News
Botched dental treatment? You may be entitled to compensation
Why a Health and Welfare Power of Attorney is a good idea
Will the new charge on building developments in Cornwall affect you?
Energy Performance Certificates – Do They Matter?
HMRC Challenging Stamp Duty Land Tax Payments
Ben Mitchell qualifies as a solicitor
The potential implications of Brexit on employment law
Appointing a guardian for your children
Houses in multiple occupation – new rules from October 2018
New Agriculture Bill published
Will Brexit affect my pension?
Dreaming of a holiday home? Sort out the legals before putting your feet up
Lasting Power of Attorney by Deborah Adams
Settled status after Brexit by Alexis Hager
How overage agreements can boost profits from your land
Top tips for first-time buyers
How Could Brexit Affect My Farm?
Wills & Succession in Spain by Deborah Adams
Brexit – an international and local view by Alexis Hager, Litigation
Capital gains tax - important facts for non-residents of the UK
Buying a home: the importance of making sure the seller is entitled to sell
Changing a will after someone has died: it is possible and it could save you money
Sad passing of Battle of Britain pilot who served with Parnall family member
Considerations when buying a heritage property
Disciplinary proceedings at work: guide for employers
Employers should have a disciplinary process in place, but just following this may not be enough to avoid falling foul of the law and exposing yourself to the risk of an employment tribunal claim.