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Two people with boxes moving into their new home

95% LTV Mortgages are back – Are they a good idea?

The budget announcement from chancellor Rishi Sunak earlier this month helped shed some light on how the UK government is planning to recover from the effects of the Coronavirus pandemic.

Those of us in the mortgage industry naturally kept a close eye on that which affected the housing market. One of the standout points was the announcement of a new initiative to support 95% LTV mortgages.

So now the dust has settled after the budget announcement, what are the logistics of this initiative? Does a 95% LTV mortgage represent a good deal for contractors and freelancers seeking a new home? 

What is a 95% LTV mortgage?  

Just so there’s no confusion, LTV stands for Loan-to-Value and means the percentage of a property’s value that you can cover by taking out a mortgage. 

A 95% LTV mortgage means you only need to put down a deposit worth 5% of the overall value of the property to secure the property.

So if you were able to secure a 95% LTV mortgage deal on a house worth £200,000, your deposit would only need to be £10,000. 

What did the government announce during the budget?

Sunak’s budget announcement disclosed some basic information regarding this new initiative, which will see the government offer guarantees to cover 95% LTV mortgage deals for major lenders.

Typically, lenders will want a higher percentage covered by the deposit. This essentially gives them confidence that you have the financial clout to keep up with payments consistently. But the new initiative offers security for lenders thanks to the government guarantee, meaning they are far more willing to commit to such mortgages knowing they are covered if things go pear shaped for the applicant down the line.

The initiative is obviously a move to try and galvanise the housing market and get more people owning their own homes. A number of lenders were reported to by launching such mortgage offerings, including the likes of HSBC, Lloyds, NatWest, Barclays and Santander.

The initiative is set to launch next month, and some further lenders have announced their 95% LTV deals this week, including the likes of Accord and Bank of Ireland.

The government ran a similar scheme back in 2013, and more than 100,000 95% LTV mortgage deals were completed. A significant proportion of these were first time buyers, meaning that getting more people on the property ladder – one of the scheme’s main aims – was firmly achieved.

Is a 95% LTV mortgage worthwhile?

The idea of putting a relatively small deposit down on a property is bound to sound appealing to anybody struggling to save up big amounts. It also leaps out as a quick way to secure that dream home, and could enable you to upgrade to a larger property than you may previously have been in the market for. 

But there are a few things to consider when it comes to a 95% LTV mortgage. Don’t be surprised if those mortgages which are supported by the government scheme come with higher rates. This means that while your deposit might be comparatively low, you could find yourself with higher repayments than with other deals in the long run. 

Another problem could arise if house prices fall substantially. Buyers could find themselves in negative equity, where they owe more than the overall value of the house. That’s something of a hypothetical situation, but it’s certainly not an impossibility.

However, if you are super keen to get onto the property ladder as soon as possible, then a 95% LTV mortgage is certainly an avenue to explore.

What’s the best approach for me?

Each mortgage applicant is different, but generally speaking, the more you can put down as a deposit, the better. Lower repayments is a benefit in the long run, and you might well be able to secure a stabler mortgage if you put more down early on.

But the return of 95% LTV mortgages for any contractor or freelancer seeking their first home opens up a number of new options. This initiative and the range of lenders committed to it could be exactly the situation required to get that deal for your first home over the line.

There are risks if the market takes a turn for the worst, but if you truly understand your financial situation and are in a stable position, then the prospect of a 95% LTV mortgage is well worth exploring. And if you’re unsure, some free mortgage advice can help you gain a better understanding of what’s what.

Mortgage Commitments

New mortgage commitments reach heady heights

Securing a mortgage is what many people have as their main life target at present. It can take years of planning and saving, but is worth it when you get the keys to your dream home.

As contractors and freelancers, sometimes unwanted hurdles can be put in the way. But with the right guidance, it is certainly possible to secure that ideal home and live the domestic dream! 

And it seems that more and more people are being able to do exactly that according to new data from the Bank of England.

What does this data show? 

The latest findings from the Bank of England analyses statistics gathered from more than 300 mortgage lenders and administrators. It helps give an indication of some of the trends in the mortgage market for the last quarter of 2020. 

Obviously, the whole of 2020 was rocked by the pandemic. But this seems not to have stopped some positive trends emerging in the year’s final months. 

The Bank of England’s Mortgage Lenders and Administrators Statistics – 2020 Q4 report found that the value of new mortgage commitments was 24.2% higher than for the same quarter in 2019.

A new mortgage commitment is where lending is agreed to be advanced in the coming months. Collectively, the value of such agreements in Q4 2020 was at £87.7 billion according to the data.

Even despite the difficulties the mortgage industry had faced throughout 2020, that figure is at its highest level since the third quarter of 2007.

What else does the data indicate?

Other findings in the report are somewhat hit and miss.

Q4 of 2020 saw Loan to Value (LTV) ratios exceeding 90% at 1.2% – 4.5pp lower than the same quarter in 2019. This is not a positive thing for anybody seeking a mortgage with a high LTV.

The value of balances with some arrears also increased by 3.4% – likely an effect of the crippling pandemic. 

All residential mortgage loans collectively were valued £1,541.4 billion for Q4 2020. This is 2.9% higher than in 2019, while the value of gross mortgage advances were 4.2% higher in Q4 2020 than in Q4 2019 – totaling £76.6 billion.

What does this mean for me?

The latest Bank of England findings suggest lenders have been making a significant effort to commit to mortgage deals with applicants. This is likely as a way to support the market bounce back from the effects of the pandemic.

If this trend has continued into 2021 as is distinctly possible, then it’s a certain positive for anybody seeking a mortgage this year.

The next set of data from the Bank of England around these trends is due to be released in June 2021. It will be fascinating to see if things have followed suit in Q1 of this year.

And it’s highly possible following Rishi Sunak’s announcement as part of last week’s budget that the extended stamp duty holiday will see more people keen to get their mortgage sorted and over the line in the next few months.

If that comes to fruition and mortgage lenders continue behaving as they did in the latter part of 2020, then, all things considered, 2021 could turn into a very positive year for the overall housing market.

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