First-time home buyers are having to look for help to grasp their dream of homeownership. A recent report stated the average length of time to save for a deposit is ten years. Inflation has made it even harder to save money for a deposit. In addition, borrowing is expensive and house prices are high, especially for first-time home buyers. It is not easy to buy a home today and it only looks to get more difficult.

There is a possible new home buyer scheme in the planning stage that is likely to be unveiled in a few days. It has been stated that it will be a government-backed scheme that allows deposits of only 1.0%. This has likely put many hopeful home buyers on the fence awaiting the opportunity ahead versus buying now and missing out. A slight buying boom could be ahead. At 1.0%, home buyers will be able to take the burden off of Mum and Dad, other family members, and friends for assistance. However, there are warnings.

Many experts warn that only putting down a 1.0% deposit could be a problem down the road for new homeowners. The scenario that is most worrying is the homeowner falling into negative equity. Declining into negative equity occurs when the home’s value falls below the debt on the property. The real issue happens when the homeowner comes to the end of their mortgage term in negative equity.

When a homeowner’s mortgage term ends, they either are transitioned to their lender’s standard variable rate (SVR), or they choose a remortgage. In most cases, a remortgage is the best option. With a remortgage, the homeowner has lower interest rate offers in comparison to a SVR and there is the opportunity to choose a fixed rate deal which could shield the homeowner if rates should rise.

Part of the criteria for a remortgage is the loan to value ratio or LTV. Borrowers will find that the interest rate offers are best when the value of the property is much higher than the loan. This is due to the risk of lending. The greater the value of the property in relation to the requested loan, the less risk the lender is taking in offering the loan and the borrower will get better deals than those that are at a higher risk. While the LTV is not the only thing a lender will look at, it is important.

When negative equity is an issue, the lender is being asked to loan to the borrower more than the value of the property, and rare few will do so. This pushes the homeowner out of reach of a remortgage and into a SVR. The difference in the repayments could be substantial and threaten affordability for the homeowner.

In a scheme when the deposit, or ownership equity, is only 1% there is a great risk of negative equity occurring should the housing market experience a decline and there is a possibility that could occur. There is always a possibility the economy could shift, and the housing market could lose demand and with it property values decline. 

The homeowner caught unaware of what might occur at the end of their mortgage term might find themselves in deep financial distress and at risk of losing their home. Being aware of the issue and preparing for higher repayments is more helpful. There is also the possibility of saving money to buy more equity of the home and emerge from under the negative equity situation. 

The requirement of a 1.0% deposit is much riskier than the last government scheme that required a 5% deposit. Even that is a higher risk than when the home buyer provides a deposit much higher at 10% or 15%, but buyer schemes can’t present a safety net for everyone, they are meant to simply assist them onto the property ladder.

Preparing for property values declining is smart for any homeowner. Knowing what opportunities are available in remortgaging is helpful as well. A homeowner simply must shop online for a remortgage to understand what opportunities are available. A few minutes online with a remortgage broker website could offer numerous remortgage quotes from a variety of lenders. Homeowners could also shop by going from one lender website to another. In the process of obtaining remortgage quotes, the homeowner can keep aware of interest rates, offers, and how their unique needs are being reviewed by lenders and when the need arises take action to secure the very best remortgage deal.

Becoming a homeowner, whether with the assistance of a scheme, financial help from family or friends, or saving for a decade or more to make it happen, understanding how the economy can impact homeownership after the purchase is important. Preparing for risks ahead that could shatter the homeownership dream is perhaps as important as any information to consider when shopping for a new home. As is remembering after the mortgage is secured, any time is a good time to shop for a remortgage.