Government eases 5% deposit mortgages back into market

Undoubtedly, the mortgage and construction markets need first-time buyers. In turn, first time buyers need 5% deposit mortgages. In this symbiotic relationship, the success of one promotes the longevity of the other.

But, during the pandemic, 5% deposit deals—first-time buyers' go-to mortgage—disappeared from the High Street. Economics were simply too precarious for lenders to back high loan-to-value deals.

So, what were would-be homeowners with low deposits to do if they wanted a mortgage?

Just like after the 2007/08 crash, it was up to the government to provide a lifeline. This time, they've done so, and with an unprecedented decisiveness.

What prompted so swift Government action?

Besides pressure from housing industry experts, economics drove the government's decision. Consumer demand positioned itself at the heart of that general 'economics' category.

The conditions of lockdowns, for those who maintained full time employment, lent themselves to the equation. Pubs, restaurants, and many high street shops closed their doors. Thus, the normal outlets for much consumer spending were, in effect, bottle-necked.

On top of this restriction, a restriction of another kind played a huge part…

Space, the first frontier

Remote working is very much a part of the new normal.

Even prior to the pandemic, more institutions were allowing employees to work from home.

COVID-19 working practices simply gave that trend a nitro turbo boost.

With this new situation, space, particularly the outdoor kind, has become a priority for homeowners. Living in the city, or even in its leafy suburbs, has sloughed off buyer's top criteria for new homes.

The desire for gardens and multi-room homes—what looked like being a fad—soon turned into a deluge. So much so that research by Defaqto found that 4 out of 5 renters are now saving a deposit for a mortgage.

95% LTV - your options

For those starting saving from scratch at the beginning of the pandemic, 15%—or even 10% deposits—are likely to be a stretch. This is what the government realised and caused them to act so swiftly.

Many of the bigger lenders signed up to the government-backed 5% deposit mortgages from the off. Whether it was their choice to do so may be contestable. But the bottom line: 5% deposit borrowing is back on the High Street for the first time since May 2020.

Yet other lenders have taken on the risk of offering 95% LTV without government backing. This should increase choice, thus ensuring comparatively competitive interest rates.

It's a brave move by those lenders going it alone. But it should help address the criticism that previous government-backed offerings came with high interest rates.

True, interest rates on 5% deals won't compete with interest rates for 15% deposits and above. But, at first glance, the new 5% rates don't seem as punitive as earlier government schemes.

Parity with PAYE permies at last?

I can imagine many contractors are considering their current residential situation. Many, especially those newer to contracting, may not yet have saved a sizeable deposit. But the tantalising call of more space in which to live and work is no less strong for them.

As with all mortgages now, lenders are looking more critically at applicants' individual circumstances. You'd hope lenders would take this opportunity to assimilate lending criteria for the self-employed. Sadly, this isn't yet the case.

From one institution to the next, lenders are still treating contractors and freelancers very differently. In some cases, even more critically than before.

5% deposit: Government-backed or open market?

Going government-backed or open market really isn't the key criteria would-be homeowners should be considering.

Finding a lender who understands contract income enough to meet their own new criteria should be a contractor's priority. But knowing which lenders those are, before submitting your application, is almost impossible.

Using a broker who can translate contract income into language underwriters grasp is more crucial than ever. If a lender cannot see the potential of your income (even when they say they do), size of deposit becomes a moot point. That criterion hasn't changed, and never will.

If you're still unsure, talk to us. The 'rule of thumb', an ever-grey area for bespoke contractor mortgages, has a more blurred imprint than ever. We can add some definition so underwriters can see your potential more clearly.