What is deposit approval? New program offers 5% mortgage on new home
Budding homebuyers and moving companies could soon buy a new home with a down payment of just 5 percent – without government assistance.
As the popular Help to Buy program nears its end in 2023, a new initiative called Deposit Unlock is launched with the aim of helping buyers struggling to get large new home mortgages.
The Nationwide Building Society, one of the UK’s largest lenders, has just joined the program and will shortly begin offering the loans.
On The Ladder: The New Deposit Unlock Program Could Help Young Home Buyers Get A Mortgage On A Newly Built Home With A 5% Security Deposit After Help To Buy Ends In 2023
Lenders often set the minimum deposit for new home at 15 or even 25 percent, which makes them inaccessible to many first-time buyers.
Because they can quickly lose value after purchase.
The Help to Buy program got around this by offering first-time buyers a loan from the government that is 20 percent of the purchase price – but it will close in 18 months.
The deposit block was initiated by the Home Builders Federation, the body that represents property developers, and the reinsurance company Gallagher Re.
It aims to help first-time buyers get up the ladder and second buyers to step up.
The downside, however, is that deposit release loans are currently only available from a small number of home builders and mortgage lenders.
The program was first heard in June when the Newcastle Building Society began offering deposit-approved mortgages.
However, this was a pilot project and limited to just four lots in the northeast with a maximum property value of Â£ 330,000.
The first major mortgage lender to commit to deposit-unlock mortgages is Nationwide
At Nationwide, the program is available through mortgage brokers for standard new home loans between Â£ 25,000 and Â£ 750,000.
The nature of the program means it’s limited to homes built by builders who have also signed up for the deposit lock – and Nationwide will be announcing this when it rolls out in the coming weeks.
We explain how the scheme works and who may be able to use it.
Why can’t I borrow so much for a new building?
Expert opinion: “Fantastic news for buyers”
Nicholas Mendes, mortgage broker at John Charcol
âThe new Nationwide program is an encouraging sign as we continue to see lenders re-enter the 5 percent deposit mortgage market.
‘This is fantastic news for buyers as there are more options to secure a property.
âIt allows them to only buy new build properties with a 5 percent down payment that is not made through the government-sponsored mortgage or Help-to-Buy program.
‘This means that you, as a home improvement or first-time buyer, can benefit from it.
Eligibility is based on Nationwide’s standard affordability criteria and is not limited by government affordability stress tests that take into account servicing of the HTB loan after the first five years.
âThere are a few restrictions, however. This system is primarily unsuitable for self-employed applicants or individuals who would own another property after graduation, for example a buy-to-rent. ‘
Lenders often have concerns about giving mortgages to those buying newly built homes. Because the real estate usually loses part of its value in the first few years.
While the first home buyer is often willing to pay a premium to get a brand new property, the second home buyer will not enjoy the same benefit and, therefore, will often not be worth that much.
Because of this, selling a newly built home can be difficult and this is what lenders worry about – because if a buyer fails to pay their mortgage and the home is repossessed, the sale of the home is ultimately theirs.
This means that buyers of new buildings often have to save larger deposits than buyers of older properties.
New home buyers may also have to pay more than new home buyers because they are harder for mortgage lenders to value.
How does the deposit block overcome this?
Sometimes when lending mortgages on homes they find riskier, lenders take out insurance called compensation.
This allows them to recoup some of the cost of repossessing a home and not being able to sell it for the amount of the outstanding mortgage – but getting this insurance costs money.
As part of the deposit lock, the home builders, instead of the lenders, pay to insure the mortgages by using some of the money they get from the sale of the houses.
The theory is that this will make new home mortgage loans more convenient for lenders.
Which houses are eligible for deposit approval?
One of the main limitations buyers will encounter is that they can only buy a home from a contractor who participates in the deposit-release system.
The HBF says 17 of its member home builders are participating in the program, and that these companies make up 60 percent of all homes built in the UK – so it sounds like some big household names will be involved.
Barratt Developments, Bellway, Keepmoat and Vistry all sold homes as part of the Newcastle Building Society pilot.
However, we don’t yet know if builders who have signed up for the full program will offer deposit sharing for all of their websites or just a small number.
Help to Buy has previously offered a home ownership route, but this is being discontinued
The fact that only two lenders are currently signed up also limits buyers’ ability to use the system – and means they may not always get the best rate on the market.
However, the HBF said the program would be “expanded” in the following months.
It told This is Money that it would soon confirm all builders and that it expects other lenders to come on board over time.
What are the interest rates and other conditions?
Each lender has their own deposit protection loan interest rates and affordability criteria, so the terms and conditions may vary.
Nationwide will offer its home loans between Â£ 25,000 and Â£ 750,000 with interest rates the same as regular mortgages.
It said: âBorrowers who use the deposit lock have access to [our] Range of 5 percent deposit mortgages, currently from 2.89 percent, with which they can buy a house or an apartment. ‘
The lowest interest rate on a mortgage with a 5 percent deposit in the market as a whole is currently 2.69 percent. So this is relatively competitive – although buyers should watch out for agency fees.
Additionally, deposit lock is only available through mortgage brokers, so buyers should check to see if their broker charges fees – although many don’t.
How is Help to Buy different?
Similar to Buying Aid, the Deposit Block allows buyers to purchase a newly built home with a 5 percent down payment.
Unlike Help to Buy, where 20 percent of the purchase price is borrowed from the government and the remainder from a mortgage lender, deposit lock buyers borrow the entire balance from their lender.
The main financial difference for buyers is that the Help to Buy loan is interest-free for the first five years, while for a deposit-approved mortgage, interest is charged on the entire amount from the start.
Working in favor of Deposit Unlock is the fact that, unlike Help to Buy, it is open to people who are not first-time buyers.
The Help to Buy program will also end in 2023, and the folks behind Deposit Unlock are hoping it could replace the initiative for at least some borrowers.
Neil Jefferson, executive director of the Home Builders Federation, said, âWith the [Help to Buy] The program will expire in the middle of next year, Deposit Unlock will help households climb the career ladder and give developers the confidence to invest in new land and workers to build on the massive increase in housing supply over the past few years. ‘
What about the government’s mortgage guarantee system?
Since April of this year, some mortgage lenders have been offering 5 percent deposit mortgages under the government’s mortgage guarantee system, which runs until the end of 2022.
This scheme may only be used for used houses, not for new buildings – which distinguishes it from the deposit release.
However, lenders who have joined the mortgage guarantee system face a conflict when it comes to signing up for deposit lock.
Under the mortgage guarantee system, lenders must pay the government to guarantee their 5 percent mortgage loan – even if they are already otherwise secured.
So if they also joined Deposit Unlock, they would have to pay the government to insure a loan that the builders had already insured on their behalf.
If major lenders already involved in the state program – including NatWest, Lloyds, Barclays, HSBC, and Santander – decide not to provide deposit insurance loans, it could limit the growth of the program.
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