What is a buyer with a low deposit to do?
- Buy a second hand property and obtain a 90% mortgage or possibly even a 95% mortgage (if you can get one at a rate of approximately 6%) and hope that property prices do not fall; or
- Buy a new build property from those few property developers who have joined the Government’s NewBuy scheme with a competitively priced mortgage and obtain a 95% mortgage from those lenders who have joined the scheme, such as Barclays, Natwest or Nationwide.
Lenders will lend at market rate as the Government will guarantee lenders from potential losses. The maximum mortgage is £500,000. However, new builds usually carry a premium for being new and as there is less ability to improve and increase the value of the property, the potential to fall into negative equity is much higher. Lenders are protected from losses but the same cannot be said for purchasers. If property prices fall, negative equity is a severe risk and a 5% fall could wipe out a borrower’s investment and the lender could pursue a borrower for the negative equity owed. Nothing related to property is guaranteed to increase in value and buyers, particularly first time buyers, must carefully consider the risks when their deposit is less than 10%, both in terms of higher mortgage rates and in pursuing a new build where the lenders are guaranteed against losses and the property developers are anxious to sell as it makes their properties more attractive.
The legal maxim which covers all property purchases is “Caveat Emptor” (Latin for “let the buyer beware”) and buyers with less than 10% deposit must bear this in mind. Particularly, since stamp duty is now payable at 1% on properties between £125,000 and £250,000 by first time buyers – that is, in addition to the purchase price and any deposit paid.
Nick Powe, Senior Property Solicitor