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Spring Budget 2021: Experts Urge Caution Over 5% Deposits And 95% Mortgages

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Spring Budget 2021: Experts Urge Caution Over 5% Deposits And 95% Mortgages

News this week of the government's Mortgage Guarantee Scheme was welcomed by buyers up and down the country.

The initiative - announced during Rishi Sunak's Spring 2021 Budget on Wednesday - means buyers can secure a mortgage up to £600,000 with just a 5 per cent deposit, making it easier to save enough to buy a home.

But experts have warned buyers to exercise caution before signing up for the scheme, which is being rolled out by banks including Lloyds, Natwest, Santander, Barclays and HSBC from April.

Buyers have been warned that 5% deposits could cause monthly repayments to increase (Credit: Pixabay)
Buyers have been warned that 5% deposits could cause monthly repayments to increase (Credit: Pixabay)
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John Ellmore, director of NerdWallet, told Tyla that while 95 per cent mortgages might make it easier for first-time buyers to get on the property ladder, they can also cause your monthly repayments to skyrocket.

"Only paying a small deposit will have a knock-on impact on monthly repayments," he said. "Firstly, the higher the percentage of the property's value that is borrowed, the higher the interest rate a buyer is likely to be charged.

"This could mean that those who took out a 95 per cent mortgage could end up paying more over time than those who saved for a larger deposit."

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5% deposits will be available from next month (Credit: Unsplash)
5% deposits will be available from next month (Credit: Unsplash)

John added: "The concept of negative equity must also be considered. This occurs when the value of a home falls, and the owner ends up owing more money than the property is worth. So, repaying the mortgage in full, when the owner sells the house could prove to be problematic.

"[However], the likelihood of this happening decreases the more of the property a person owns - again highlighting a potential benefit for saving longer for a larger deposit."

Rightmove's director of property data, Tim Bannister, told Tyla: "We always advise that people don't stretch themselves when deciding how much they can afford, and crucially, they should factor in all the costs associated with buying a home and becoming a homeowner, not just their deposit.

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"Lenders will still be asking buyers to go through strict affordability checks and buyers should always make sure they can comfortably afford mortgage repayments before committing themselves."

What is the Mortgage Guarantee Scheme?

The new scheme will allow buyers to purchase with just a five per cent deposit. It means the government will offer lenders the guarantee to cover the remaining 95 per cent, should the buyer default on monthly mortgage payments.

Buyers will still have to go through all the usual affordability checks, but saving for a hefty deposit won't be as difficult for first time buyers desperate to get on the property ladder.

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The scheme is set to begin in April. It will not be available for buy-to-let purchasers, but will be available to first-time buyers.

According to Rightmove, the average time for a seller to find a buyer is 65 days, with a further 126 days to go through the legal process to completion.

Featured Image Credit: Pixabay

Topics: Money, Life

Unity Blott
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