Getting a deposit together, while forking out for rent, is one of the biggest barriers to Londoners getting on the property ladder.
Propertymark recently found that, to save up a 10 per cent deposit of £36,000 for an ‘average first-time buyer home’ in London, takes households in the capital around eight years.
To make this target a little more achievable, Barclays has just launched a 95 per cent loan-to-value mortgage for homeowners purchasing new build properties.
The Barclays mortgage covers properties up to £600,000, meaning the maximum deposit required has been halved from the £60,000 normally required to £30,000.
What’s refreshing is that, compared to other low deposit schemes, Barclays’ 95 per cent mortgage has relatively affordable rates; the lowest on offer is currently 4.79 per cent for a five-year fixed and 4.82 per cent for a two-year fixed. The new mortgage uses Barclays’ standard affordability criteria to assess income and there are no product fees.
“We’ve been incredibly focused this year in making home ownership affordable, from the introduction of innovative propositions like Mortgage Boost to tweaked lending criteria allowing us to safely lend more to help customers achieve their ambitions,” says Lee Chiswell, Head of Mortgages at Barclays. “Raising the maximum LTV for new build houses is yet another initiative that I’m proud to say will help people who may previously not have had enough for a deposit on their dream home.”
The main advantage of this mortgage is that less of a deposit is required so first-time buyers can get onto the property ladder earlier than they would have, saving on rent and hopefully building up equity in their property.
Another pro is that the mortgage is available on new build properties, which are often disqualified from such low deposit schemes as they’re more at risk of negative equity. The interest rate is also not particularly high.
On the flip side, taking out such a high loan-to-value mortgage can leave you vulnerable to negative equity. This scheme is only available on new builds which come with a premium attached and can drop in value when it comes to selling. If prices are inflated at the point of purchase, and then subsequently fall, owners could find themselves in negative equity — a situation homeowners in the Eighties and Nineties became all too familar with as dramatic crashes and relaxed lending regulations saw buyers stuck in homes worth far less than they paid for them.
In the current London market, which is stagnant at best, this is something to be aware of. If you need to sell your home for less than you bought it for, your lender would have to agree to let you pay off the shortfall.
It’s also worth remembering that, while the deposit amount needed is low, applicants still need to pass the bank’s affordability and credit criteria.
How does it compare to other products and schemes?
Barclays’ low deposit mortgage is not the only product aimed at first-time buyers. There are also cross-overs with the government-run Mortgage Guarantee Scheme which sees lenders offering 95 per cent mortgages and the government guaranteeing the loan with the lender. Like Barclays, the price cap is £600,000 but this applies to both new building and existing homes.
Alternatively, for those, struggling to raise any deposit, Skipton Building Society has launched a 100 per cent mortgage product, which uses rental payments and household bills to assess affordability. This mortgage is fixed for five years but comes in at a much higher interest rate of over six per cent. It’s also likely to be more difficult to get approved as your monthly mortgage payments cannot exceed the average of your last six months of rent. Both standard and new build homes are eligible.
Another scheme is Deposit Unlock, which sees first-time buyers and home movers purchase new build properties from participating house builders with a 95 per cent mortgage. The developers pay into an insurance policy, which protects lenders against loss and means they can offer products at lower interest rates.