95% LTV mortgages can only go so far in helping first-time buyers

Steve Collins

March 3, 2021

house prices housing boom

Steve Collins is chief executive of Rentplus

While it is welcome news that the Chancellor has committed to addressing the deposit barrier via the 95% mortgage guarantee scheme, the scheme can only do so much for first-time-buyers.

With affordability now at its worst level since the financial crisis, the 5% deposit is still a significant hurdle for many of those who unable to save while renting.

According to data from the Land Registry, house prices rose by almost 8% last year, but earnings remained flat as many workers were put on furlough.

As such the house price to earnings ratio, a measure of affordability, jumped from 9.5 (2019) to 10 (2020), according to property agent Benham and Reeves.

Furthermore, according to the most recent ONS House Price Index, the average price for a first-time-buyer was £224,560, so a 5% deposit under Help to Buy or the 95% mortgage guarantee scheme would still require buyers to have saved £11,000 plus legal fees; an extortionate hurdle for those who struggle to save whilst renting.

This issue will become even more apparent when the furlough scheme comes to an end, when millions will likely face redundancy challenges.

Despite government incentives, it is very likely that mortgage companies will continue to only accept offers made by those in stable employment.

Moreover, debt will play a more significant part for people in the future, with many low and middle-income families having used their savings to supplement their incomes throughout the pandemic.

Many of those who struggle to save for a deposit are our key workers: nurses, teachers, and retail workers.

Their dedication during the crisis has shown us all just how important they are for the nation, yet despite this, it will take many years for most of them to save for the 5% deposit and the legal expenses.

Furthermore, we must ensure that the 95% mortgages do not result in a rapid inflation of house prices, which will affect first-time buyers at its core.

To prevent this, we must ensure that supply can keep up with demand.

Recent figures have made clear that government funded schemes, which have already been rattled by the pandemic, do little to match the demand of aspiring homeowners, with MHCLG having failed to deliver the 200,000 starter homes it promised first time buyers in 2015.

Privately funded providers continue to play a significant role in boosting the overall number of homes for first-time buyers, and meeting demand for those on social housing waiting lists.

Crucially, moreover, the scheme does not rely on government funding.

Affordable rent-to-buy, which is the Rentplus model, is one such alternative.

Our approach enables people to rent properties at a discounted market rent, with the option to purchase the home after a set period of time.

We offer our tenants a gifted 10% deposit at the point of sale to ensure that ownership is achievable.

The average household income of Rentplus tenants is £32,000 compared with the £55,000 of those using help-to-buy.

It is clear that a 95% mortgage guarantee scheme alone is not enough to address the startling number of aspiring homeowners, who remain unable to access the funding they require.

It is imperative that we look at alternative ways to widen access to homeownership, ensure demand is met and mitigate inflation.

Rent-to-buy schemes that tackle the heart of the affordability gap can go a long way in relieving this issue.

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