Yet higher mortgage rates could see Chelmsford buyers paying a lot more each month for the privilege

 

Being a Chelmsford first-time buyer in the last 12 months has not been an easy thing. Just before lockdown there were 400 ‘5% deposit mortgage’ deals and first-time buyers were able shop around to get the best deal. When the first lockdown hit, 5% deposit mortgages disappeared, meaning that as many Chelmsford would-be first-time buyers were about to buy their first Chelmsford home in 2020, the rug was pulled from under their feet.

 

Today, you can count on two hands the number of mortgage deals which allow a 5% deposit. Even worse, the number of hoops one has to jump through to get a 5% deposit mortgage is very high (plus you have to pay handsomely for the privilege, with mortgage rates of at least 4.15%).

 

In putting down a 5% deposit, you borrow the remaining 95% as a mortgage. These 95% mortgages (or Loan to Value) were very popular with Chelmsford first-time buyers before the Credit Crunch. Nearly 1 in 6 mortgages were 90% to 95%+ Loan to Value mortgages in 2007 (15.5%), yet as the Global Financial Crisis hit in 2008/9 that dropped to only 1 in 63 mortgages being in 90% to 95%+ range in 2010 – meaning many Chelmsford first-time buyers were unable to buy their first Chelmsford home between 2010 and 2015.

 

 

Yet in the recent budget, Rishi Sunak has vowed to back the building societies and banks so that they can offer more of these higher 95% Loan to Value mortgage deals.

 

Many people have said this will mean there will be a Chelmsford house price boom – especially as Stamp Duty is extended until September

 

This scheme is nothing new as a practically identical scheme was launched by George Osborne in the 2013 Budget with his Help to Buy Scheme. Nearly 1 in 5 houses sold in the year after that budget used this scheme, yet Osborne’s was only for first-time buyers and it was only for brand new homes (not second-hand homes). Whilst there is no doubt this caused an increase in house purchases, many commentators said it was a backdoor method to keep the country’s new homes builders afloat.

 

The big difference with this new 2021 scheme is that it is available for Chelmsford second-hand homes as well and is open to all Chelmsford owner occupiers moving home

 

Yet, what will the banks mortgage interest rate charge be?

 

Although no building societies or banks have yet publicised what mortgage rates they will charge, all the High Street lenders including NatWest, Santander, HSBC, Virgin Money, Barclays, and Lloyds have stated they intend to offer these 95% LTV mortgages.

 

Under the Government’s mortgage guarantee to the banks, Westminster will guarantee 20% of any mortgage offered at 95% Loan to Value. In principle, that means that building societies/banks should be able to offer the low mortgage rates as those available to people wanting to borrow 75% Loan to Value.

 

At the moment the average five-year fixed rate mortgage is 3.6% with a  10% deposit, but if you have a 25% deposit, you can fix it for  five years at 1.63%

 

However, don’t forget though that the banks will be charged a ‘still to be decided’ amount to use the Government guarantee. On the last Help to Buy Scheme, it was rumoured they were charged 0.9% of the mortgage borrowed, so this cost would have to be passed on to the first-time buyer. I would suspect the eventual rates Chelmsford first-time buyers will have to pay is in the region of 3%.

 

This new 95% mortgage/5% deposit scheme is only going to work if banks and building societies have sensible mortgage rates as it needs to help those Chelmsford first-time buyers it was intended to help, who are finding it hard work to get on the first rung of the Chelmsford housing ladder.

 

It all comes down to how anxious the banks and building societies feel about the true long-term effect of the pandemic once the furlough scheme ends in the autumn. Only time will tell.

 

Yet, to give you an idea of the difference the mortgage rates scheme will make on a typical Chelmsford terraced/town house …

 

The average price paid for a Chelmsford terraced/town house in the last 12 months was £318,800

 

Assuming a 35-year repayment mortgage and borrowing that amount on each scenario:

 

  • At the current best 95% LTV mortgage rate (i.e. 5% deposit) of 4.15% mentioned at the start of the article, that would cost £1,440 per month in mortgage payments

 

  • At the current average 90% LTV mortgage rate (i.e. 10% deposit) of 3.6% mentioned in the middle of the article, that would cost £1,336 per month in mortgage payments

 

  • At the best 75% LTV mortgage rate (i.e. 25% deposit) of 1.63% mentioned at the start of the article, that would cost £996 per month in mortgage payments

 

As you can see, quite a difference.

 

I have to applaud Rishi Sunak for this initiative, yet will it be ‘fields of clover forever’ for the Chelmsford property market with the new scheme? No, it won’t.

 

It will be a good boost to the Chelmsford (and UK as a whole) property market. Whilst the mortgage guarantee offers a small portion of security for the lenders, it does focus on the riskiest part of the housing market. Many lenders still have cold shivers of the Northern Rock 125% mortgage debacle from a decade ago and those memories still ring true today.

 

The fact is these types of mortgages will be a higher risk, even if the Government are underwriting them with their smaller deposits, which will come through in bank’s and building societies higher pricing for these mortgages. Also, the lenders are already at near full capacity trying to get hundreds of thousands of existing property sales and purchase deals through because of the Stamp Duty rush over the last 9 months. I await the rates in early April and will make comment again.

 

If you are a Chelmsford homeowner, potential Chelmsford first-time buyer or anyone involved in the Chelmsford property market and you would like to chat about anything I’ve covered in this article or any of my other articles on the Chelmsford property market, please don’t hesitate to drop me a line.

About Neil Baldock

Born and bred in Chelmsford, Neil went to Tyrells and The Boswells School and still lives in Springfield. A former police officer, Neil is an excellent problem solver for our clients. Neil oversees the Lettings, Property Management and Maintenance portfolio here at CDC and is able to offer specialist advice on all aspects of buy to let and property investment in Chelmsford and all areas of Essex. Neil is happy to offer advice to landlords even where the property is not being purchased through our agency and would welcome an informal chat with you regarding your investments. Neil is also well versed in HMO Management as we are one of the only agencies in Chelmsford which has a specialist HMO and rooms to rent department. Neil is Matthews younger brother and has a son named Michael.

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