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18 Oct 2020

Government pledges 95% mortgages for two million first-time buyers - how will they work?

Prime Minister unveils plans for 'generation buy' with low-deposit mortgage deals

The government is planning to make 95% mortgages more widely available to first-time buyers, but questions remain over how the proposals would work in practice.

The Prime Minister says that two million prospective first-time buyers could afford mortgage repayments but are struggling to get approved for a home loan and believes unlocking more low-deposit loans will create 'the biggest expansion of home ownership since the 1980s'.

Here, Which? explains how the plans could work and outlines the difficulties facing first-time buyers who have seen their mortgage options dry up in 2020.

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What has the Prime Minister pledged?

Speaking at the Conservative party conference last week, the Prime Minister said he wants to 'turn generation rent into generation buy'.

His proposals involve unlocking long-term fixed-rate 95% mortgages, at a time when low-deposit loans have disappeared in the wake of the coronavirus outbreak.

With lenders having withdrawn most of their 90% and 95% mortgages, first-time buyers face the prospect of needing a 15% deposit to get on to the property ladder.

How would the proposals work?

The government is yet to provide details of how it plans to make mortgages more readily available, but it might require changes to current regulations or direct intervention.

Rules brought in after the financial crash of 2008 limit the number of high loan-to-value mortgages lenders can offer to customers.

When you apply for your a mortgage, you'll usually be allowed to borrow a maximum of four-and-a-half times your annual income, and the Bank of England's regulations mean lenders can only offer 15% of their loans at this level or higher.

Theoretically, these rules and other affordability measures could be relaxed to enable buyers with smaller deposits to borrow more, but mortgage lenders would be reluctant to take on the additional risk, especially at a time of economic uncertainty.

One alternative would be for the government to guarantee the loans, meaning it would be responsible if borrowers default, a process similar to the Help to Buy mortgage guarantee scheme that closed in December 2016.

The other unanswered question is where the new swathe of buyers will live. In recent years, the number of new homes being built has been propped up by the Help to Buy equity loan scheme, but stricter rules are set to come into force from next April and the scheme will end completely in 2023.

95% mortgages and house deposits

As we mentioned earlier, banks have slashed their 90% and 95% mortgages since the start of the COVID-19 pandemic, with nine in 10 deals being removed from the market.

Those that have remained on sale have become harder to get, with lenders limiting terms, capping lending amounts, and blocking buyers of flats and new-build homes from applying. Some banks have even launched 'flash sales' lasting 24 or 48 hours to cope with demand.

The removal of low-deposit mortgages is significant for first-time buyers as it means they'll need a much larger deposit to buy a home.

85% mortgages are still widely available, but many buyers will be priced out by the need for a bigger down payment. If you purchase a home at the average first-time buyer price in England (£213,000), you'll need a deposit of £31,950 to get an 85% mortgage, compared with £10,650 to get a 95% deal.

How much deposit will you need to get a mortgage?

House price5% deposit (95% mortgage)10% deposit (90% mortgage)15% deposit (85% mortgage)

95% mortgages and negative equity

95% mortgages are a hot topic as they unlock home ownership for cash-strapped first-time buyers, but they also come with higher rates and significant risks in a volatile housing market.

Right now, the property market is on the rise, with the government's temporary stamp duty cut resulting in soaring demand and rising prices.

But that could be short-lived. Property experts have suggested that house prices could fall in 2021 following the end of the stamp duty holiday, which could leave people who buy homes with a 95% mortgage at risk of negative equity - when the home is worth less than the amount they owe on the mortgage.

Best rates on low-deposit mortgages

It's not currently possible to get a 95% fixed-rate mortgage without a guarantor, but there are still a handful of 90% mortgages on offer - albeit with the aforementioned restrictions in place.

The tables below show the cheapest 85% and 90% fixed-rate deals available to first-time buyers, based on our analysis of data from Moneyfacts.

85% mortgages (151 deals available)

Fixed termLenderInitial rateRevert rateFees
Two yearsYorkshire Building Society2.55%4.49%£1,495
Five yearsYorkshire Building Society2.65%4.49%£1,495

90% mortgages (23 deals available)

Fixed termLenderInitial rateRevert rateFees
Two yearsNationwide Building Society3.49%3.59%£999
Five yearsCoventry Building Society3.45%4.49%£999

First-time buyers and the 'bank of mum and dad'

The struggles facing first-time buyers have been highlighted by a new report from the Legal & General, which shows the degree to which they rely on the 'bank of mum and dad'.

The insurer says 56% of under-35s get help from their parents when buying a home, with parents playing an active role in more than 73,000 purchases this year.

The report says parents lend or gift an average of £19,000 to buyers under the age of 35, and that 71% of those who've benefited say they wouldn't have been able to get on to the property ladder without the assistance.

Advice for first-time buyers

If you're looking to buy your first home this year, we're here to help.

As a starting point, check out our step-by-step guide on buying a house, which takes you all the way from saving for a deposit to exchange and completion.

If you're struggling to get to grips with how mortgages work, we've got lots of advice on the types of mortgages, how much you can borrowand how to boost your chances of being approved.

Finally, why not check out our newly released mortgage lender reviews for 2020, which combine customer ratings with our expert deal analysis to identify the UK's best mortgage lenders.