In Real Estate, it seems a universal problem that young people struggle to get onto the property ladder. In late 2019, Bloomberg reported that the median age of first time buyers had increased to 33, the oldest since records began in 1981, briefly summarizing the problem lying in higher property prices and student debt. In the UK, the problem is the same, with a whole generation of young people being dubbed ‘generation rent’ as it is increasingly unlikely that young people would be able to buy a home before the age of 33. Many people only can afford to rent, but as rent prices are on average quite high, it makes saving up for a house deposit rather difficult. Rent however, is normally higher than the monthly mortgage repayment. In their latest announcement, the current UK government has announced plans to help turn ‘generation rent into generation buy’ amidst the current coronavirus crisis, by making fixed-rate 95% mortgages available to first time buyers.
The scheme intends to make more mortgages available to first time buyers, the offer of a 95% percent mortgage would mean that buyers would only need to have saved a 5% deposit of the house price to apply for a mortgage. Meaning that the initial payment that one would need to save to purchase a house, would be reduced. A fixed-rate would mean that despite interest rate changes a buyer would be able to pay back the same amount for the length of the fixed-rate period. Currently on average, in Britain, a first-time buyer puts down a deposit of 14%, although many mortgages are available at 10%. The general rule however, is that the larger the deposit the better the loan rate.
According to the Financial Reporter: ‘Should the latest offering by the Government relax rules around lending affordability criteria as is widely expected, a 5% option would not only reduce this requirement by 9% but would lower the initial financial barrier for first-time buyers by £17,981.’ This would also vary depending on region as some areas of the UK are more expensive and the average deposit is therefore more.
Stylist quoted Johanna Noble, money editor at acclaimed financial advice website MoneySavingExpert.com, who stated: “It’s a tough time for those wanting to get a foot on the first rung unless they have a sizeable deposit of at least 15%… Mortgage deals for first-time buyers with a low deposit have been disappearing from the market since the start of the coronavirus crisis. Currently, there aren’t any standard mortgage deals available for first-time buyers with a 5% deposit. Those with a 10% deposit might struggle too as there are only about 15 standard deals available to them – a fraction on what was available at the start of the year – with several of these being long-term fixed deals where you’d be locked in for up to 11 years.”
Although previously there have been 5% mortgages available, they were few and far between as they were a risk for both lenders and buyers. Normally these would be offered at a higher interest rate as well. Further, the risk associated with the 95% mortgages was problematic – if the market crashed, a house with a 95% mortgage may more easily suffer from negative equity. As seen most famously in the 2008 housing crash where thousands of people saw their houses reducing to less than they were borrowing for them. If you sold your home, you would be left in debt and it would be significantly more difficult to buy the next.
In addition to a 95% being a risky endeavor should the housing market crash, some experts also believe that this move may not be enough to help first time buyers switch from renting to buying. Many have also commented that there is not enough detail from the government’s announcement as to how the scheme would actually work.
Again speaking to Stylist, Caitlin Wilkinson of the UK organization Generation Rent, said: “Two-thirds of private renters have no savings at all, and renting is unaffordable for women on an average salary in almost every area of the country. For those who do manage to save up for a deposit, this policy will do nothing to bring house prices down, as the prime minister has done nothing to increase the supply of housing. To address the housing crisis, the government must build more genuinely affordable homes, while ensuring that the private rented sector is secure and safe for people living in it now.”