Over the past 10 years, we have seen the size and shape of the mortgage market shift considerably, adapting to consumers’ needs when they want to buy a home.
*UK Finance and Hometrack: ‘Mortgage lending supports over 70 per cent of housing transactions. Gross mortgage lending has doubled to £268 billion over the last decade, supported by rising sales and house price growth.’
The coronavirus pandemic affected the mortgage market and in 2020, many lenders withdrew their high ‘loan to value’ (LTV) products. Now the picture is more positive and we have seen the reintroduction of a lot more 90% and 95% loan to value deals.
How high how low can you go?
How much you can borrow comes down to your income, your outgoings and your credit score, all factors that the banks and building societies will consider when deciding whether they offer you a maximum 95% loan-to-value (LTV) mortgage, or whether they’re prepared to offer a lower LTV amount.
Taking out a 95% mortgage is an attractive option because it means you need to save less of a deposit – 5% to get on to the property ladder with the loan covering the rest of the property’s purchase price.
There are competitive deals for buyers with just 5% to put down as a deposit. Although the lowest mortgage interest rates are reserved for borrowers with bigger deposits of around 40% plus.
Renting versus buying
Paying rent whilst trying to save towards a bigger deposit can feel like you’re wasting money, when you’d rather move quickly. A rising housing market could result in having to save up more over a longer period, if prices increase. It’s worth remembering, that the more you save towards a deposit, the more options you will have to secure a lower interest rate.
Government 95% mortgage guarantee scheme
In the Spring Budget 2021, the Government announced a new 95% mortgage guarantee scheme, effectively replacing ‘Help to Buy’. This new scheme began in April 2021 and is available to all homebuyers looking to purchase a property up to £600,000. It requires them to put down a 5% deposit and the Government underwrites the 95% loan to cover the remaining purchase price.
Major financial institutions, including Barclays, HSBC, NatWest and Santander have signed up, with Virgin Money and Accord and others coming on board.
Fixed-rate, tracker or variable mortgage
As well as establishing how much you can borrow, you need to decide whether to fix the rate of your mortgage or opt for a variable deal.
Loans for the budget-conscious
Many of us are budget-conscious buyers opting for a fixed-rate mortgage for two to five years (depending on the fixed rate period selected). These deals give us peace of mind with monthly payments staying the same unaffected by any rise in interest rates. Moving before the end of a fixed-rate deal, usually means an early repayment charge (ERC) or mortgage redemption fee will be payable.
At the end of any fixed-rate deal, unless you agree another fixed-rate offer, lenders will move you on to their more expensive standard variable rate (SVR).
Tracker mortgages are another option where you have a deal that links the interest rate paid to the Bank of England base rate. Any change to the base rate alters the tracker rate. For example, if a tracker deal is set at 1% above base rate, it will always be 1% more than whatever the base rate is at the time.
*Report writing led by Richard Donnell, Research Director at Hometrack with support from Bob Pannell, independent consultant in Jan 2020.
