It goes without saying that 2020 brought some challenges to the property market, particularly for first-time buyers. The economic pressure that was brought on by the pandemic saw a rise in house prices, mortgage lenders withdrawing any deals consisting of a 10% deposit or less and savings rates at an historic low. However, there are now some signs that the property market is improving so first-time buyers should begin looking to take their first steps onto the property ladder.
Deals for First-time buyer mortgages
Most first-time buyers look to get onto the housing ladder with a deposit of 10% or less. When looking at mortgage rates, this means that they will likely be looking at deals available to those with a 90% loan-to-value (LTV), which would require a 10% deposit, or a 95% LTV, which requires a 5% deposit.
When the pandemic began, mortgage lenders saw 90% LTV mortgages as too much of a risk and withdrew lending at 90% LTV and above, making it difficult for many first-time buyers meet the new criteria. At the beginning of March 2020, there were 779 mortgage deals available at a 90% LTV, but just one month later in April, this had fallen to 326. By July, there were only 70 mortgage deals available at a 90% LTV.
In recent months, there has been an increase in the number of deals at 90% LTV. In December there were 88 deals available, but by the 11 January 2021, this had risen to 169. Although first-time buyers would hope that the number of 90% LTV deals continue to rise, we're also in a time of economic uncertainty meaning there is a risk that lenders could withdraw again. One positive outlook for the start of 2021 is that it is unlikely we'll see the number of 90% LTV deals reach the low levels they were back in March 2020.
A fall in house prices for 2021?
One reason why lenders may be unwilling to lend at a 95% LTV is that there is the possibility that house prices could fall this year. If house prices fall by 5% or more, it would mean that those who bought their home with a 5% deposit would owe more on their property than it would be worth and put them into negative equity.
Although there is the risk that the ongoing economic uncertainty, along with the end of the stamp duty reduction in March 2021, will see house prices fall, there is also no certainty that this will happen. The latest Halifax House Price Index revealed that in December 2020 house prices had continued to increase, albeit at a slower rate than in the months previously.
Many first-time buyers may welcome a fall in house prices, but if house prices fall, it could indicate further economic uncertainty. It may make mortgage lenders more cautious about approving mortgages to first-time buyers, especially those without a very high credit score.
Should you consider a guarantor mortgage?
A guarantor mortgage can be useful for those first-time buyers struggling to get a mortgage, or who cannot save enough for a 10% deposit. A guarantor mortgage requires the third party (a parent or grandparent) to put an asset as a guarantee against the mortgage. The guarantor will be liable for any outstanding repayments if the borrower fails to do so.
As mortgage lenders see guarantor mortgages as secure, lenders sometimes accept guarantor mortgages with very little deposit or none at all. There are risks with guarantor mortgages, if house prices fall, the borrower could end up in negative equity, and the guarantor may lose their home if repayments are not met. These mortgages can be a good way for first-time buyers to get onto the property ladder without saving for a large deposit.
Help to Buy
An alternative way that first-time buyers can get onto the housing ladder without saving for a substantial deposit is using a Help to Buy scheme. Help to Buy loans have been around for many years, at the end of last year the Government launched a new Help to Buy Equity Loan scheme, which restricted the scheme to first-time buyers only and introduced regional price limits on house prices.
The new loan is set to replace the existing scheme in April 2021, but first-time buyers can apply for the loan now. However, they cannot move into their new home until April.
Should you use a mortgage broker?
With several different options available to first-time buyers and the challenging 90% and 95% LTV mortgage market, first-time buyers should consider speaking to a mortgage broker. A broker will provide advice and support on choosing the best option for their situation.
Mortgage brokers are legally required to work in your best interest — not in the interest of the bank or lender.