How it could be possible
The Help to Buy mortgage guarantee and equity loan schemes are designed to help people with a small deposit amount secure a property on favourable terms.
The equity scheme is a loan for up to 20pc of the value of a new build home (or 40pc in London) that the Government gives to you interest free for five years. The idea is you need a smaller mortgage and can therefore access a wider variety of mortgages at better rates.
The mortgage guarantee scheme involves the Government guaranteeing a portion of your mortgage for your lender. It effectively enables a provider to offer you a higher loan to value mortgage with greater degree of confidence, and is not restricted to new builds or first time buyers.
You need a minimum of a 5pc deposit for either scheme, meaning for a house priced at £200,000 or under you can theoretically get a house with a £10,000 deposit, although how this works in practice is another question entirely.
There are a range of non-Help to Buy linked 95pc loan-to-value (5pc deposit) mortgages out there too, read our round up here.
Problem one: salary and credit record
The deposit amount is only one part of getting a mortgage, a lender also needs to see that you will be able to manage the payments.
The lender will work this out on an individual basis based on multiple factors, including salary, expenditure, debts owed and credit history.
The question put to Mr Cameron was if those on the national living wage would be able to afford a home.
Based on the current UK living wage of £8.25 an hour, an individual working 40 hours a week, 50 weeks of the year would earn £16,500 before tax.
A couple together would have a household income of £33,000, which based on a four-times salary multiple (a simplified measure) would enable them to borrow a maximum of £132,000 in a best case scenario, assuming they had a clean credit history, no other debts and minimal outgoing costs.
According to the Halifax House Price Index, the average house price across the UK is £208,000.
Taking a more conservative £180,000, with a 5pc deposit using a standard 95pc mortgage you would need to borrow £171,000 (the other £1,000 from the £10,000 would be needed for stamp duty).
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To be lent that much, assuming all other elements are in order, would typically require an income of £42,750. Using regional average prices, that figure is £80,000 for London and £53,000 for the South East.
David Hollingworth, associate director of communications at London and Country Mortgages, said: “The scoring requirement is likely to be higher for those with a small deposit so applicants will need to be sure they can meet the affordability requirements and have a clean credit record.”
The other point to make is if £10,000 is all that you have been able to save, it is unlikely your salary will be high enough for a 95pc mortgage. The equity loan can of course help here, if there are new builds available in your price bracket.
High rates: should you buy with so little cash?
Those buying with a minimal deposit face some of the steepest mortgage rates out there.
Mr Hollingworth said: “It remains true that those that can only muster 5pc of the purchase price will face higher interest rates than someone with a larger deposit.
“For example, HSBC offers a Help to Buy guarantee two-year fixed rate at 3.69pc to 95pc LTV with no fee. Yorkshire Building Society offers a two year fix at 2.18pc to 90pc LTV with a £1,475 fee.”
Based on borrowing £150,000 for 25 years (5pc £7,500 deposit), the HSBC mortgage would cost £18,391 over the fixed term. Borrowing £142,500 (10pc £15,000 deposit) for 25 years with the Yorkshire Building Society mortgage would cost £16,272 including the fee over the fixed term.
The Prime Minister’s £10,000 figure ignores the question of whether you should buy with such a minimal deposit amount.
In the comparison here, saving for longer to access the second mortgage option would save thousands and put you well ahead on equity at the end of the fixed rate term, opening up better re-mortgaging options.
Stamp duty and fees
A deposit is not the only cost of buying a house. If we take a property priced at £150,000 – that somebody with a £10,000 deposit (6.6pc) might actually be able to access – the stamp duty will be £500. For a £200,000 property it will be £1,500.
It depends on your particular broker and mortgage, but surveyors, legal fees, valuation, moving costs and other costs often add up to a few thousand pounds on top of that.
With all of these costs deducted from the £10,000, Cameron’s figure only works in this regard on properties around the £100,000 mark, which are by no means “typical”.
Regional applicability and future house prices
The £10,000 figure is just about applicable in the cheapest regions, although average salaries are typically lower in those areas too.
The overall regional applicability is mixed, and it is dubious to say that somebody looking to buy a typical home can do so with £10,000. For instance, the average first time buyer price in the South East is over £220,000.
Additionally, house prices are changing fast. The average first time buyer price for the UK as a whole rose 8pc from 2014 to 2015, with multiple regions rising well above that rate.
By the end of David Cameron’s term, the average first time buyer purchase price nationwide could easily be north of £200,000.
Calculator: when will you be able to afford a house?
- House price today: Pick your desired location for an average house price, or you can enter any value you please up to £999,999.
- Desired deposit: What percentage of the house price you want or need to save – remember this can be as little as 5pc with Help to Buy.
- Annual savings: The average you think you can save per year – if you’re not saving much but will be, then put an overall expected average.
- Total start amount: How much money you have already got saved.
- Total assistance available: How much you will be given towards a house by family or other sources. Don’t include Help to Buy here; to factor that in, drop the deposit amount instead.
- Annual house price inflation: How much house prices will go up per year. The Office for Budget Responsibility average for the next five years is around 5pc, which is the default here, but change it as you please.
- Attitude to risk: This is how willing you are to take risk with your money through investing. The low figure would be if you were sticking to Isas and savings accounts with little to no investment. Medium would involve investing in some stocks, funds or other risk taking options, but steering clear of anything too risky. High would involve taking a significant amount of risk with your money, but with greater potential returns.
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