The pandemic has made it harder for first-time buyers with small deposits to get a mortgage. Here’s what you need to know if you’re trying to get on the property ladder right now.
As things change rapidly during the coronavirus (COVID-19) crisis, this guide will be updated regularly to reflect changes in rules and regulations.
Trying to get a mortgage can be difficult enough at the best of times. However, the economic shock caused by the government's Coronavirus lockdown rules have made mortgage lenders even tougher for those needing to borrow to fund a home purchase.
Things are especially tricky right now if you are a first-time buyer borrower with a small deposit, as mortgage lenders are likely to be even more cautious about offering you a loan than before the pandemic crisis took hold.
The dip in economic growth caused by COVID-19 disruption combined with a rise in unemployment could cause house prices to fall. While that might sound like a good thing, it could leave borrowers in negative equity.
Negative equity describes a situation where the value of your home falls below the value of the mortgage you still have left to repay on it.
If you’re a first-time buyer with a small deposit, you typically have higher monthly mortgage repayments. Lenders therefore view you as being at higher risk of falling into negative equity.
This means that many leading lenders have pulled their best mortgage deals for borrowers with small deposits from the market.
The number of mortgages available to first-time buyers with deposits of 5% or 10% of their desired home’s value has dropped off dramatically since early March, according to property website Zoopla.
When we checked on 4 August, there were only 27 different first-time buyer mortgage products available for people borrowing 95% of their home’s value.
That’s down from 391 at the beginning of March, according to financial information group Moneyfacts.
The good news is that if you are able to get a mortgage offer, the Bank of England’s (BoE) decision to bring the base rate down to historic lows means that it can be possible to find a deal with manageable monthly repayments.
The BoE base rate influences all loan and mortgage interest rates in the UK. When the BoE decreases the bank rate, interest rates usually decrease as well. This means borrowing gets cheaper for both house buyers and banks and building societies.
According to Zoopla, mortgage rates in April fell in response to the cheaper borrowing costs.
The site reported that the average cost of a two-year fixed rate mortgage fell from 2.36% on 1 April 2020 to 2.13% on 22 April 2020. Meanwhile, the cost of a five-year fixed rate deal dropped from 2.66% to 2.37%.
If you’re fortunate to be in a position to get a mortgage now and get that rate fixed for the next couple of years, then you will be protected from any increases in interest rates in the meantime.
If you’re a first-time buyer you have no experience holding a mortgage, which means the lender will not know how well you will keep up with repayments.
If you’re a relatively young first-time buyer, your credit record will contain less information to help a lender decide if you’ll be able to make repayments.
But getting on the property ladder can be easier if you know what help is available and where to find the right mortgage for your circumstances.
Here are some tips to help you maximise your chances of getting your ideal home.
There are two ways that you can apply for a mortgage. You can either apply directly to a bank or building society by going online or visiting them in-branch.
Some are ‘whole-of-market’, which means they can offer mortgages from every lender, and some offer exclusive deals.
A good, trustworthy mortgage broker can be very useful, as they can take the time to find a mortgage deal for you based on your financial and personal circumstances.
A Lifetime ISA is a savings account with a difference. For every £4 you put it in up to £4,000, the government will add a 25% bonus each tax year.
That’s £1,000 of free cash. It’s too good to turn down!
But, as with many things in life, there are strings attached. You can only spend the money you save in a Lifetime ISA on either a first home purchase, or to use during your retirement (from age 60).
There are a number of government initiatives designed to help you afford your first home. The Help to Buy scheme offers an interest-free loan for five years towards a new build property worth up to £600,000. It is only available for first-time buyers in England.
There are separate schemes for:
Wales, where the scheme works in the same way but with a maximum purchase price of £300,000
Scotland, where the Affordable New Build Schemes let you buy a home with a 5% deposit and a 15% equity stake provided by the government
Northern Ireland, where you can buy a home worth up to £150,000 through their Co-Ownership scheme
If you're a first time buyer or looking to move house or remortgage, we can help you find the best mortgage deal to suit your needs.