The news that the Government has extended its 95% mortgage scheme should help first-time buyers purchase their first home amid what is 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 ability to save, all against a backdrop of successive interest rate hikes.
To make matters worse, since the mini-budget, scores of higher loan-to-value mortgage deals have been taken off the market, leaving little choice for those who have been able to save enough for a deposit.
Before September, the 95% scheme had had fairly little take-up largely because lenders had their own deals, and buyers were going directly through them.
However, since the huge changes in the market prompted in part by the turmoil produced by the mini-budget, these 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.
While the industry should be supportive of anything that helps get people on the property ladder, having a very high loan-to-value mortgage does expose buyers to the risks of negative equity.
If house prices do drop, then only having 5% equity in a property does not leave the buyer with much equity to play with.
Homeowners who find themselves with negative equity will have an uphill struggle if they want 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.
Similarly, if they are looking to move home, they 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.
Another issue that negative equity creates is if you come to the end of your mortgage and want to re-mortgage, you will be forced to stay with your current lender and, in some cases, you won’t be able to access as attractive a mortgage offer and could potentially see your monthly payments increase.
This is because some lenders don’t have as competitive rates for their existing customers as they do for attracting new ones.
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 loan-to-value 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.
Charlotte Nixon is mortgage expert at Quilter
