Hopeful home buyers are expected to be presented with a scheme that could make all the difference in bringing affordable property purchasing into reach. In the spring budget, Chancellor Jeremy Hunt, will present a 99% mortgage scheme for new builds. This would reduce the amount of a deposit required for a property to only 1% of the purchase price. The purpose of the scheme is to assist people onto the property ladder as well as help bring more housing into the market.

There are supporters of the scheme due to the hope of assisting first time buyers back into the housing market. Prices are still elevated from the buying boom brought about by the pandemic and borrowing is expensive due to the current lender offers. In addition, saving for a deposit has been difficult due to inflation, which rests at 4% or 2 times the target rate of 2.0%.

According to a recent report, the average deposit is taking ten years to save. 

Prime Minister Rishi Sunak has stated he is set on bringing new housing opportunities to those hoping to realize the dream of homeownership. He stated he is aware of “people’s anger when that feels too far away for too many, especially the younger generation.”

There are also those that believe the scheme could spell hardship for the new homeowners. Due to the lower deposit requirement, homeowners right off the start will own only 1% of their property, which is a low level of equity. It puts the homeowner in a risky position of facing negative equity should property values decline and the debt remains higher than the value of the home.

Negative equity will prevent a homeowner from being able to remortgage, and therefore the benefits of remortgaging are unable to assist exactly when it is likely to matter the most. 

Remortgages can save a homeowner money. When rates are rising or elevated, a remortgage could offer a lower interest rate along with a fixed rate to lock in the deal for the length of the chosen term. This shields the homeowner from further rate hikes. The remortgage also saves the homeowner from being transitioned to the lender’s standard variable rate or SVR which usually has a much higher interest rate, and therefore more expensive, than what a remortgage could offer.

If rates are declining, a remortgage could also be helpful versus a SVR. In this case, again, a remortgage will likely have a lower interest rate and save money. 

The final decision on the buyer scheme has not been made, but it is expected to move forward. The new budget will be offered on 6 March, and the scheme could be introduced prior to the release of the budget.

Experts caution that while the deposit is more affordable with the scheme, the cost of the property as well as the higher cost of borrowing is still present. Experts caution that the offered interest rates are likely to be higher than those offered on the market outside of the scheme. Getting into the property might be easier than staying should certain scenarios develop in the economy, such as rising interest rates when the buyer’s term ends and they need to remortgage at a higher rate and leave behind their lower rate.

This is the situation for homeowners that purchased only two years ago, sometime in 2022. Those that chose a two-year fixed interest rate deal were offered low interest rate deals much different from those currently available. So much so, affordability is now an issue with many homeowners expecting to miss a repayment this year and others falling into arrears.

In February 2022, the Bank of England’s Monetary Policy Committee (MPC) had voted to increase the standard base interest rate to 0.50%. The current rate, which has been held steady for four months, is at 5.25%. At the end of a two-year fixed rate, the homeowner will either choose a remortgage or transition to their lender’s SVR, which as mentioned could be much higher than the rates offered with a remortgage.

The advice of experts is for those that do take advantage of the new scheme to keep aware of their need to remortgage at the end of their chosen term. It is easy at anytime to obtain remortgage quotes online. Doing so will offer remortgage quotes to review and compare and determine what opportunities are available so the homeowner will be prepared for higher repayments or possibly lower repayments should rates decline.

Knowing the importance of a remortgage when the time comes and simply being aware of the benefits of avoiding a SVR could go far in creating a safety net for a new homeowner’s financial future.