Help to Buy mortgage guarantee
The Chancellor also announced a mortgage guarantee to help buyers with a 5% deposit. The Help to Buy mortgage guarantee, like the one introduced in 2013, is likely to see the government underwriting a proportion of the purchase price. For lenders, this inherently makes loans to buyers with a 5% deposit less risky, which should be reflected in lower interest rates.
With the government underwriting the first 20% of the purchase price, if current 95% LTV rates drop all the way to 75% LTV rates to reflect the lower risk to the lender, it has the potential to bring down the monthly cost of repayments significantly. In Great Britain, this could equate to £165 per month or £1,978 per year for the average first-time buyer with a 5% deposit. Or by £6,105 in London.
While 95% LTV mortgages are typically more affordable in the north than in the south, the scheme is likely to have a larger impact for buyers in the south given that at present far fewer southern first-time buyers can afford to service a 95% mortgage. If lenders offer those with a 5% deposit lower rates, it means the average household taking out a 95% LTV mortgage will go from having to earn just under £40k, to just over £30k.
As a result around 80% of first-time buyers will have the income to service a 95% LTV mortgage, up from 60% at present. In London however, just 40% of first-time buyers will earn enough.