The possible extension was reported over the weekend but its year extension was announced this morning by HM Treasury.
Charlotte Nixon, mortgage expert at Quilter, said that the extension of the scheme should help first-time buyers on to the property ladder, adding that it was a “trying time for them”.
“They face issues ranging from inflated house prices, inflation rapidly eating away at their deposits, and the rising cost of living disrupting their abilities to save, all against a backdrop of successive interest rate hikes,” she noted.
She added that since the mini Budget “scores of higher LTV mortgage deals have been taken off the market” which reduced choice for those who had been able to save a deposit.
Nixon said that prior to September the scheme had “fairly little take-up largely” as lenders had their own products and buyers were going directly to them.
Since its launch in April last year it has helped 24,000 households, with around 85 per cent of those being first-time buyers.
However, this has changed since the turmoil of the mini Budget as high LTV deals have “become rarer, although not completely extinct”.
“The popularity of the scheme may therefore soar next year as potential buyers are pushed into the scheme due to a lack of choice elsewhere,” Nixon noted.
High LTV mortgage brings risk of negative equity
Nixon continued that while the mortgage industry should be “supportive of anything that helps get people on the property ladder” having a high LTV mortgage exposed buyers to risks of negative equity.
She explained: “If house prices do drop, then only having five per cent equity in a property does not leave the buyer with much equity to play with.”
Nixon said that for homeowners who find themselves in negative equity they would have an “uphill struggle” to sell their homes.
“If house prices drop, then a homeowner wanting to sell will not be able to cover the repayment of the outstanding mortgage and moving costs from the proceeds of the sale and would need to then find the difference from their own funds,” she added.
Nixon also stated that those looking to move home would need to cover all the negative equity to redeem the existing mortgage, moving costs, and a deposit for the new purchase.
“This lack of flexibility can have big consequences, particularly for younger buyers, as they are more prone to sudden changes in circumstances, such as needing to relocate for a new job or needing extra space for a growing family,” she added.
Another issue for negative equity is for those coming to the end of their mortgage and wanting to remortgage.
She said that borrowers could be forced to stay with their current lender and may not be able to access as attractive a mortgage offer. This could in turn lead to an increase in mortgage payments.
“While there is not always a lot you can do if you find yourself in negative equity, it is always worth seeking mortgage advice if you think you are going to end up in this situation. Advisers may be able to look at lower LTV mortgages for you that help reduce the risk of this happening if you have the funds available.
“So although the scheme is no doubt well-meaning, potential buyers need to weigh up the risks of using it at a time when the outlook for the property market is somewhat uncertain, at least in the short term,” she concluded.
