This week it was announced by the UK government that the 95% mortgage guarantee scheme would continue to be rolled our for a further 12-months after a successful 20 month run since April 2021 and helping an estimated 24,000 low deposit buyers to secure a mortgage. According to the gov.uk website, under the mortgage guarantee scheme, the government will offer lenders a financial guarantee so that they can provide mortgages that cover 95% of the value of a property, subject to normal mortgage affordability checks, on a house purchase worth up to £600,000. Undoubtedly a positive thing for struggling first-time buyers who are unable to save more than 5% deposit, however predictions for drops in the value of property in 2023 and beyond have called into question the topic of negative equity for these borrowers.
2022, 2023 and beyond
In 2022 we have seen a real shift in how people get mortgages and the entire property finance market in general, not just here but abroad too. In the UK specifically, getting a mortgage has become somewhat trickier and rates have increased to levels not seen for years due to various economic pressures. This has in turn caused a knock on affect to property prices. Although still at higher values than ever before, most experts expect that property prices will reduce in 2023 and the next few years as competition and bidding wars for property is expected to reduce. This is mainly because people who potentially would have thought about buying may be waiting until rates drop further or until the economy is a bit more stable before making such a large purchase.
For those that are still looking to purchase, this might be a great opportunity to get a good deal on a home that might have otherwise been slightly out of their budget. And, for those looking to make use of the government’s 95% mortgage guarantee scheme in 2023, you could get your dream home at a discounted price compared to last year and with as little as 5% deposit. However, experts are concerned about the prospect of these borrowers potentially finding themselves in negative equity.
What is negative equity?
To put it in the most simple terms possible, negative equity is where the value of the property drops by so much that you actually owe money if you decide to sell it. For example, you could have bought a house for £350,000 with a 10% deposit of £30,000 and a mortgage of £315,000. During the time that you own your property the value could hypothetically drop drastically. In normal times, this could be due to anything. Things like structural damage to the property, issues with the area, flooding could all be reasons for the property losing value.
When you go to sell, you might find out that your home has now lost £50,000 in value, in which case it would mean that you would need to sell your home for less than you bought it for. This could mean that you owe the bank more money than you sold the property for so you are unable to clear the mortgage balance, you might not have any equity remaining from the sale of the property to put as a down payment on your next home. This means that you are in negative equity rather than making a profit on the sale of your house, something that most people hope for!
Could The Mortgage Guarantee Scheme Put Me In Negative Equity?
Some experts think that the expected property price decreases in 2023 could send a lot of people with 95% mortgages in to negative equity. Although there aren’t any completely accurate predictions of how much property prices will fall, Nationwide building society have been reported as predicting a 5% drop in value in 2023.
So that means that if a first-time buyer purchased their starter home at £200,000 on the mortgage guarantee scheme with 5% deposit (£10,000) they would need a 95% mortgage of £190,000. If the value of their property dropped by 5% in 2023 it would be worth £190,000 meaning that they literally have no equity in their property. If the property value dropped again in 2024 they could end up owing more on their mortgage than the property is actually worth. This could force the first-time buyer to delay their next purchase and stay in the property longer than they anticipated.
What Do The Experts Think?
However this is all hypothetical and things aren’t likely to change as drastically as some doomsayers predict. Property has been and will likely always be a great way to invest money. Yes, there will be some big changes over the coming months and years for people’s finances, but the best thing to do if you are considering getting a 95% mortgage and are worried about dropping property prices is to speak to a financial adviser first. We at Oportfolio will be able to talk you through your options, the pros and cons of purchasing at high loan to value, we can advise you on property to purchase and areas to buy in and we can help you to make the right decisions.
If you or anyone you know is looking to buy with a low deposit or just want to talk through property prices, feel free to give our team a call today. We are here to help.