95% government backed mortgages. A bad deal.

When the chancellor announced the mortgage guarantee scheme in his March budget, we said we'd wait to see the details. Now we've got them, and it's not all roses. As well as throwing petrol on the property price fire, they're a really bad deal.

Many first time buyers will welcome help onto the home ownership ladder. A first sight, the new 95% mortgage scheme seems like a good option. However, there are strings...

The scheme

When the pandemic struck last year, mortgage lenders all but ended the availability of 95% mortgages. In an effort to kick start the first time buyer market Rishi Sunak announced that the government would offer lenders a guarantee on the difference between a 95% mortgage and 80% in the event of a borrower defaulting.

Essentially, the buyer pays a low deposit and the lender's risk is limited to 80% of the property value, covered by the property itself.

A number of high street lenders have signed up, including HSBC, Santander, Barclays, Lloyds and NatWest. 

All, notably, have excluded new build properties.

The strings

Or, at least, one major one. The interest rate.

The interest rate on an 80% mortgage is around 2.25%.

The interest rate on a 95% mortgage without government support is around 4%. Risk and reward.

Under the scheme, the government is assuming much of the lender's risk, so it might be reasonable for them to reduce interest rates to reflect this.

They're not. The interest rates being asked are similar to those without the government guarantee, i.e. around 4%. The cheapest on offer at the moment is 3.9%. Borrowers are also being asked to sign up to 5 or 10 year fixed rates.

One very highly respected commentator described these terms as "exorbitant". Perhaps if more lenders offer these mortgages, competition will drive rates down.

For now, the bank of Mum and Dad might still be the best bet.

The effect on house prices

Lenders are not advancing mortgages for new build properties under the guarantee scheme, so supply will be constrained. The 95% mortgage scheme will increase demand. There is only one direction property prices will go. Up.

Affordability will be an issue. At 95% borrowing and premium interest rates, the biggest limiting factor may become the repayments rather than the deposit.

Prices in London, the South East and much of the South West are already so high that buyers on average salaries will still be priced out, so the effect may be limited. It is in the more affordable areas - everywhere else - that pressure on prices will mount.

Who might be the biggest beneficiaries? Buy to let investors buying in the Midlands and North will likely do rather well....