What 95% Mortgages and Stamp Duty Holiday means for home buyers

By now you may have heard from the UK Budget announcement about the 95% mortgages and the nil-rate threshold of stamp duty being extended. If you’re still not entirely sure what went on during the Budget announcement last month, we’ve broken it down for you on our blog here

Essentially, the UK Government has pledged to help first-home buyers to turn “Generation Rent” into “Generation Buy”, but today we will be diving deeper into what exactly these schemes mean for buyers; the good and the bad!

Let’s explain these schemes in a little more detail:

Stamp Duty Holiday

If you’re unfamiliar with what stamp duty is, it’s a tax you must pay when you buy a property or land over a certain price.

As stated in the Budget announcement, the nil-rate threshold of stamp duty will be extended until 30th June 2021, meaning that no stamp duty tax will have to be paid for the first £500,000 of a residential property purchase, and £150,000 for non-residential properties.

What does this mean for buyers?

For buyers, this means that you are able to keep some money in your pockets by not having to pay for the stamp duty tax, or much less, potentially saving you thousands. Whilst the nil-rate threshold for properties under £500,000 will only be extended until June 30th 2021, from 1st July 2021 the first £250,000 of a property will be exempt from stamp duty for first-time buyers. The allowance will then return to its pre-pandemic threshold of £125,000 from 1st October 2021.

95% Mortgages

The return of 95% mortgages can be both good and bad for first-time buyers, but first, let’s cover what it is. 

95% mortgages are aimed to help more people get onto the property ladder by only having to pay a 5% deposit (on properties under £600,000) rather than the standard 10-20% deposit required.

For example, if a property was £500,000, you would only have to put down £25,000 to secure the property and so you’re borrowing the remaining £475,000. Essentially you’re borrowing on a larger proportion of the value of the property as you likely haven’t built up enough savings.

As the scheme is now backed by the government, buyers have more options to choose from as more lenders are offering 95% mortgages.

Pros

With house prices increasing, purchasing a property isn’t exactly cheap (but we’re sure this comes as no surprise). As you can imagine, only having to pay a 5% deposit comes with many advantages such as: 

  • Getting onto the property ladder much sooner, because you won’t have to save for as many years for your deposit.

  • Save thousands in rental fees you would otherwise have to pay over the years. Instead, the monthly repayments you will pay for your mortgage will contribute to you owning your home.

  • Become the owner of a potentially appreciating asset, as the value of the property, may increase over time. If you decided to sell the property later down the line you would potentially be able to make a profit.

  • Allows you to have more options with a smaller deposit amount because you have a wider range of properties you can now look at within your budget. However, it’s important to note that the home you buy is still within your means. This is because though you can pay for the deposit, you also need to account for the remaining balance you would have to pay off over the years.

Cons

Having to pay a lower deposit comes with a higher risk for both you and the lender. Thereby some disadvantages include: 

  • Higher interest rates to protect lenders because a 95% mortgage comes with greater risk.

  • Remortgaging could be difficult as you would start off with having low equity in your home.

  • There’s a higher risk of negative equity because you would only start off with 5% equity of your home. Therefore, if the value of your home decreases you would end up paying more for your mortgage than the property is worth. If you can afford to, you could consider overpaying on your mortgage as it builds your equity quicker.

  • High loan to value ratio which means that you would have to pay higher lending fees as you are borrowing a large percentage of the property price.

With these schemes in place, first-time buyers may be able to get onto the property ladders sooner and save years of saving for a deposit to purchase a home. Whilst the 95% mortgages hold various advantages, one’s financial situation should still be carefully considered if you are actually able to take on such a commitment and cover any unforeseen expenses. Even with only having to pay a 5% deposit, it’s still important to have your finances in check first to cover your back!

The following is for general information and is not intended as a form of financial advice by Finndon or its representatives, nor the information intended to be relied upon by individuals in making any financial decisions.

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