The 95% home loan is back and this time it is government backed. The commitment by the Chancellor to propping up the housing market was cemented in the March 2021 budget by the announcement of an extension and tapering off of the Stamp Duty Land Tax (SDLT) holiday and the new 95% mortgage guarantee scheme.

This allows banks and building societies to offer loans to borrowers who only have a 5% deposit. The scheme is open to first time buyers or current homeowners buying a home up to £600k. The government announcement trumpets the scheme as being “an affordable route to home ownership for aspiring home owners”.

Catherine Williams, a partner in Shoosmiths Real Estate team and head of the firm’s Living Sector gathered the thoughts and insights on just how effective this intervention will prove to be and what impact it may have on the housing market from fellow experts across the team.

Large parts of England and Wales will remain unaffordable

Initial products on the market are not the most competitive (at around 4%) and affordability tests of ratios of 4.5 to 4.75 of the borrower’s salary will mean these products will not be available to all. A recent article in the Guardian demonstrated that buyers in the South East are either ruled out or restricted in their choice and so buyers in areas with generally lower house values may benefit more. It is also worth noting that the lenders who have products available (HSBC, Halifax and NatWest amongst others) are not lending on new build properties.

Shoosmiths Living Sector experts share those reservations. David Parton, head of Conveyancing at Shoosmiths, points out the effect on first time buyers:

“They have been in large part frozen out of the market in the last year with many lenders pulling 95% mortgages as we entered the Covid crisis, presumably concerned that markets would be rocky and they wanted to avoid their exposure. We all know that aside from the lull in Spring last year the market roared back, driven by buyers with solid levels of capital to invest for all of the reasons well-rehearsed – more space, home working, getting out of cities etc.”

New Builds and shortage of supply

Steve Wiltshire, head of Shoosmiths Housebuilders Subsector, notes that none of the big lenders’ 95% products are available to buy new builds, due to an apparent concern that new builds have more prospect of a negative equity trap should prices fall:

“House prices are very strong at the moment and in the main it seems housebuilders are fairly easily able to sell at or above advertised asking prices. However, none of this accessibility to loan products and the general frothiness in the market is going to help the supply of houses.”

That, according to Melissa Barker, head of Plot Sales, remains the key problem:

“There is clearly a shortage of supply at present. If the average selling time (sold subject to contract which effectively removes it from the market) for a property going on the market is one week, this shortage of supply will also keep housing prices rising.”

Karen Stewart, Head of Private Property observes that even prior to the new 95% products, demand was and is the most significant thing affecting house prices. The stock estate agents have is flying out the door with high demand pushing the prices up.

Supply side gridlock

There is a definite feeling amongst all Catherine’s Living Sector colleagues that the market was rather frothy before this (latest) intervention so what next? And demand is not the problem right now, it’s the supply side that needs fixing. We need 265,000 houses a year to keep up with population growth according to Liam Halligan in The Telegraph this week. How will we get supply up? Immediate issues are that building sites are still operating with reduced presence on site due to Covid and supplies on site are being constrained by a lack of shipping containers and reduced staff at ports.

A false dawn?

Right now, the sun is shining, things are opening up and everything is feeling brighter. It’s easy to imagine many couples sitting in pub gardens up and down the country (finally) with an Aperol spritz or a beer in hand pondering whether the time is right for a move to somewhere with a bigger garden or a home office or out of cities into unspoilt countryside. Catherine concludes:

“I am not normally one to be a party pooper, but spirits might be dampened in the next few weeks. Insolvencies are up 44.8% between February and March and with furlough coming to an end in just over a week there are going to be a lot of businesses reviewing their overheads and cutting their cloth accordingly. The SDLT holiday is tapering off over the coming months as well. There is a risk that some of the very buyers who are entering bidding wars for property right now (and therefore potentially overpaying) may not have jobs in the coming months.”