The Bank of England is currently reviewing mortgage lending rules to decide whether they should allow lower deposits.
Concerns over the fact that first-time buyers were being left out of the market, have led the Bank of England to review their mortgage marketing recommendations. These recommendations include affordability standards that place a cap on the size of a loan as a share of a borrower’s income.
The review has been launched at a time where low-deposit mortgages are under threat, with 5% mortgage deposits reduced to the lowest number they have been all year. Only eight mortgages are available with a 5% deposit, compared with 391 in March this year.
On top of this, the number of diverse deals for 10% mortgage deposits has fallen from 779 to 88 throughout the same period.
Pressure on Boris Johnson, who pledged to help more first-time buyers get on the property ladder in his Conservative Party conference speech in the autumn, spurred him to request this review.
The prime minister has asked ministers to look into allowing more mortgages to be offered with a 5% deposit in order to help would-be homeowners who are being asked for larger deposits during the current COVID-19 pandemic.
How might the changes differ from the current mortgage rules?
Back in 2014, the former chancellor George Osborne gave stricter powers to the Bank of England so they could intervene in the housing market. The reasoning behind this was to prevent the property market from overheating by imposing harsher limits on borrowing.
These limits reduced the number of riskier mortgages banks could sell and forced them to ask borrowers whether they could pay their mortgage rates in the event that interest rates increased by 3%.
The Financial Policy Committee recommended that only 15% of mortgages from individual lenders should be given to people borrowing 4.5 times their income. At the time the interest rate was expected to increase by 2.25% over five years but this increase never materialised.
Currently, Threadneedle Street believes a jump in interest rates by 3% is unlikely considering its base rates are at 0.1%, with City investors expecting it to stay lower for much longer than they had previously anticipated.
In its regular financial stability report, which outlined this new review, the Bank of England has said: “This suggests that households’ capacity to service debt is more likely to be supported by a prolonged period of lower interest rates than it was in 2014.”
With the UK interest rate at a record low at the start of 2020, and the expectation that rates won’t increase meaningfully over the next few years, the Bank of England’s review will decide whether the 2014 measures are still necessary.
Is this review the only way for first time buyers to get on the property ladder?
The Bank of England will report its findings from the mortgage review next year, but there are other options available in case the review doesn’t change the current rules for lenders.
The government’s Help to Buy equity loan scheme has been introduced to help people purchase new build properties with a 5% deposit. The government will top this deposit up with a 20% equity loan, or 40% in London.
The Help to Buy scheme is only available to first-time buyers, those who don’t currently own a property and never have, and despite running from 1 April 2021, is available for people to apply for as of 16 December this year.
The equity loan provided by this scheme is interest free for five years and with the combined 5% deposit and 20% equity loan, enables buyers to qualify for a 75% loan-to-value (LTV) mortgage, which tend to have lower interest rates than mortgages with a higher LTV.
Get expert advice on buying your first home
At Devereux & Co, we have a team of specialist conveyancing solicitors who can provide practical advice on how to buy your first home.
Whether you are able to afford the current 10% mortgage deposits, are waiting for the Bank of England review, or need help applying for the government’s Help to Buy equity scheme, we will handle all the legal aspects of your conveyancing transaction efficiently.