In March 2021, it was announced that the 95% mortgage scheme will be introduced in April of this year, a scheme set to not only aid all kinds of buyers in obtaining a mortgage but to boost the market significantly.
95% mortgage scheme and the 2021 budget
Introduction to the 95% mortgage guarantee scheme
The 95% scheme allows buyers to borrow up to 95% of the purchase price of their chosen property in the form of a loan, with the remaining 5% used as a deposit (hence why it is also commonly referred to as the 5% scheme). The scheme, suggested by Chancellor Rishi Sunak, has been put in place by the government in order to aid people with less money onto the property ladder. This has been especially helpful during the current coronavirus outbreak, as a large majority of British people have been put onto furlough or lost their employment entirely, making it harder for them to get their foot in the door when it comes to saving for a deposit, and purchasing a property.
Following the events of last year, and considering current government schemes, many now predict that there will now be a higher demand for property, both commercial and residential. As the 95% scheme is not only limited to first-time buyers, its assistance has the potential to reach far more people than the Help to Buy scheme does, making a boost to the market nationwide incredibly likely.
Bearing in mind the current imbalance of supply and demand in the UK market, there is significant potential here for investors to capitalise on: whether through land development, fixed returns investments, or portfolio establishment and expansion.
The Benefits of Mortgage Schemes for Investors
Reflecting on the Help to Buy scheme
In the 2013 Budget, former Chancellor George Osborne created two schemes under the umbrella title ‘Help to Buy’, with the intention of helping buyers to get a mortgage during what was a slow decline in homeownership. These two schemes still exist today, and are called ‘equity loans’ and ‘shared ownership schemes’.
The government owns a set percentage of any home purchased using an equity loan, meaning if the owner were to sell, then the government would take a 20% cut of the finalised selling price. The shared ownership scheme, which is exclusive to first-time buyers and/or previous homeowners struggling financially, is for people who can’t afford to pay off the entire mortgage at once and therefore are given the opportunity to pay a percentage (between 25% and 75%), with the rest of the percentage marked up under rent.
Help to Buy was initially beneficial upon its instatement because it made mortgages more affordable, which resulted in property prices increasing: according to data collected by Shelter, a UK-based housing charity, the house prices in 2013 rose by 1.4%.
Comparing the Help to Buy and 95% mortgage schemes
An amended version of the Help to Buy scheme will be in effect until 2023 (based on the government’s July 2020 update) but it will likely fall into obsolescence following the 95% scheme starting in April 2021, as has the potential to bring in more clientele to the property market. The point of the 5% scheme is that anyone is able to apply (pending mortgage lender approval): this means that the more properties an investor has, the better chance of getting prospective buyers.
It should be noted that with recent government backing of 95% mortgages, changes to the Help to Buy scheme are not set to negatively impact the property market as previously thought. In addition to this, the current imbalance of supply and demand within the UK property market will undoubtedly increase the value of any property investment made: the government’s housing target for this year is 300,000 house sales by the end of the stamp duty extension, however, this is unlikely to have a large impact on trying to counteract the imbalance.
In a way, the Help to Buy scheme has only stood to increase the demand for new developments, making land development and fixed returns excellent options for keen investors. The 95% mortgage scheme should work to extend this demand.
Eligibility for the 95% scheme
Up until March 2021, a lot of mortgage providers (such as HSBC and Virgin) had amended their policies to state that they’re unable to work under the 5% scheme due to the coronavirus outbreak. Rob Houghton (CEO of Reallymoving) commented that, in the second half of 2020, there was a decrease of 12% in first-time buyers, with existing homeowners benefiting more from the stamp duty holiday.
However, since the 2021 Budget was announced on March 3rd, these decisions have seemingly been reversed, most likely due to the government’s incentive of pledging to back the majority of 95% mortgage applications, providing an opportunity to increase the number of first-time buyers this year.
It is understood that Rishi Sunak, the current Chancellor of the Exchequer, is aiming to provide more and more opportunities for people to obtain mortgages, which will benefit property market investors greatly; alongside other members of parliament (including Prime Minister, Boris Johnson), Sunak wants to turn “Generation Rent” into “Generation Buy”, ushering in an entirely new group of property owners that mostly consist of first-time buyers.
Those currently functioning under furlough will find that the 95% mortgage scheme will vary from business to business (as a number of mortgage providers will not consider buyers without a regular income, regardless of whether or not they’re receiving help from the government), however, there are plenty of mortgage options available for furloughed employees or simply buyers functioning on a lower, average income.
How will the 95% scheme affect property prices?
Britain’s economy is still attempting to recover from the impact of COVID on our workforce, trade and property market. A substantial amount of prospective buyers are trying to be as conservative as possible with their money; with the 5% scheme, it will now be easier for prospective buyers to put down a deposit and get on the property ladder.
According to Which, buyers can ideally borrow up to “five times [their] salary” with the 5% scheme, easily calculated by online services that take income, credit score and affordability into consideration. There’s also a general limit of £600,000 associated with most mortgage providers.
Understandably, there is the concern of just how much money the government is borrowing and how that will eventually have to be made up, evident from the tax increase on our horizon.
Despite this, the combination of the 5% scheme with the furlough and stamp duty extension means that, even if house prices do eventually increase, it shouldn’t have a largely negative effect on the average investor: the extensions allow people more time to close sales, wider access to the 5% scheme and more room in one’s budget for saving deposits. In essence, the extension will undoubtedly boost Britain’s property market during a time where it is most needed, as well as increasing the demand for new property builds that will now be more widely accessible to those who are first-time buyers or previous homeowners who are just struggling financially.
What can investors expect to see in 2021?
Managing director of GRE Assets, Michael El-Kassir, has remarked that the lockdown (as a consequence of the coronavirus pandemic) combined with lower interest rates, the Help to Buy scheme, the 95% mortgage scheme and the stamp duty extension has resulted in a “wake-up call” for prospective buyers, with many people now re-evaluating their criteria in searching for new homes.
Martin Bright, director of Fees Free Mortgages, has said: “We can’t wait to resume helping first-time buyers with small deposits! Fees Free Mortgages specialise in helping first-time buyers and we welcome the Government’s decision to back mortgages for first-time buyers. We’re expecting an increase in activity within the housing market. Our mortgage advisors have already seen a spike in appointments since the announcement of the return of 95% mortgages. There are a lot of first-time buyers keen to get on the housing ladder.”
In pushing the ideology of Generation Buy, the government will be removing the obstacle of a smaller deposit void that has prevented a substantial amount of first-time buyers from entering the property market. In the past year alone, 23% of these prospective buyers have had their loan value reduced by their mortgage providers and, with more people entering the market, there’s a variety of opportunity for investors – from land development to fixed returns.
What distinction wealth can do for you
Here at Distinction Wealth, we pride ourselves on helping our clientele get the best results (and return on investment) possible.
With the property market in 2021 projected to become increasingly more competitive now that the 95% mortgage scheme has been backed by the government, it certainly is the time to invest. The work, though rewarding, can be rather complex but that’s where we come in.
Distinction Wealth are expert advisors to investors all over the UK, aiding in all aspects of the property investment process, and offering a wide range of comprehensive services including property sourcing, portfolio acquisition, fixed returns, and land development.
Now is the time to expand, or establish a high-quality portfolio of property with potential. Our experienced advisors are here to aid you in ensuring the success of your investment at every step of the way. Contact us today to discuss your objectives for 2021 and beyond.
For more information visit Fees Free Mortgages website
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