What 99% mortgages could mean for first-time buyers… and the housing market

• Government reportedly considering 1% deposit scheme for aspiring buyers
• It could help those struggling to save – and perhaps boost housing market 
• Repayments on small-deposit mortgages are high – and negative equity a risk

Jeremy Hunt is reportedly drawing up plans that would allow first-time buyers to get on the property ladder with a 1 per cent deposit.

The 99 per cent mortgage scheme could be announced in the Budget on March 6 by the Chancellor to help those struggling to build up enough savings to buy a home.

The Government is set to offer banks financial guarantees to encourage them to hand out mortgages covering 99 per cent of a home’s value.

This would be similar to the existing Mortgage Guarantee Scheme, which aims to help those buying homes with 5 per cent deposits.

If it is confirmed, the policy would no doubt be welcomed by some first-time buyers. 

However, critics say that it could also push up house prices, and that struggling first-time buyers may not be able to afford the monthly repayments required on such a large mortgage, especially as rates remain relatively high. 

How could it help first-time buyers?

There is little detail on the scheme, but in theory it should mean aspiring homeowners will be able to buy their first home with an even smaller deposit.

Someone buying a £300,000 property with a 5 per cent deposit needs to have built up savings of at least £15,000 to get a 95 per cent mortgage. 

Under the new scheme, they may need as little as £3,000 – alongside the funds required for a solicitor, surveyor and potentially a mortgage broker.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Any scheme which assists those wanting to move from ‘generation rent’ to ‘generation own’ should be applauded. 

‘If first-time buyers are struggling to get on the ladder, it has a knock-on effect for the rest of the market, as it can’t function properly. But as with anything, the devil will be in the detail.

‘If people can afford mortgage payments but are struggling to save up for a deposit because of high rents, then a 99 per cent option makes sense but it needs to be carefully underwritten.’

However, critics argue that 99 per cent mortgages would be irresponsible and put borrowers at risk of negative equity in the future, if house prices fall.

UK house prices fell by 1.4 per cent last year, according to the Office of National Statistics.

Negative equity is when a home becomes worth less than the remaining value of the mortgage. 

If that happens, the owner may be left unable to remortgage, and in some cases be forced to sell their home to pay the bank.

Peter Stimson, head of product at MPowered Mortgages says: ‘The Chancellor’s move to introduce 99 per cent mortgage loans is an irresponsible attempt to grab headlines rather than create solutions and is indicative of a government that has run out of ideas.

‘A 99 per cent mortgage is, in essence, a 100 per cent mortgage – the 1 per cent deposit hardly contributes to preventing losses.

‘This approach puts borrowers at significant risk of falling into negative equity and encourages poor financial decision-making. 

‘As such, this appears to be a particularly surprising decision from a government promoting a nation of investors and savers. 

‘At a time when climbing the housing ladder is already a struggle, should we really be saddling first-time buyers with even more debt?’

Tomer Aboody, director of property lender MT Finance, adds: ‘The concern with near-100 per cent mortgages is if there is a return to the financial crisis, when borrowers couldn’t in reality afford to purchase their home and there’s a dip in earnings, or possible job losses, the affordability goes. 

‘Then any market dip erodes the equity which leaves borrowers unable to refinance.’

Will it make property more affordable? 

Buyers are likely to find their ability to get a 1 per cent deposit mortgage is dependent on their earnings.  

Many first-time buyers are not only priced out of the property market because of the deposit required, but because of how much they are able to borrow.

All mortgage lenders limit borrowers to a maximum loan-to-income ratio. 

This is a cap on the amount banks will lend based on the borrower’s annual income. They are able to offer some loans above this level, but there are tight restrictions on how many.

 If a single person was buying a £300,000 property with a 1 per cent deposit, they would typically need an annual income of at least £66,000

As a general rule of thumb, most first-time buyers will find themselves limited to a maximum of 4.5 times their annual income.

If a single person was buying a £300,000 property with a 1 per cent deposit, they would typically need an annual income of at least £66,000.

On top of that, mortgage lenders ‘stress test’ borrowers, to check they could still afford their repayments if the mortgage rate went up when their their initial fixed rate ends in two to five years.

For example, on a two-year fix charging 5.5 per cent, a lender might stress test the borrowers’ ability to pay 8.5 per cent, or on a five-year fixed rate it might stress test at 7.5 per cent.

After the initial fixed period, if the borrower does nothing and lapses onto the lender’s higher standard variable rate (SVR), they should in theory be able to afford the higher monthly costs.

But these stress tests can also inhibit the maximum amount someone can borrow. 

Would it be popular? 

There are some doubts over whether many first-time buyers would actually sign up to a 99 per cent mortgage deal.

The average deposit put down by a first-time buyer last year was around 25 per cent, according to UK Finance.

Meanwhile, the average first-time buyer is borrowing at 3.36 times their annual income, which is significantly under the maximum they would typically be allowed to borrow at.

This suggests buyers are keen not to overstretch themselves when it comes to buying their first home. 

Are similar mortgages already available?  

Skipton Building Society made headlines last year when it launched a 100 per cent mortgage for renters to enable them to get onto the property ladder without a deposit.

Another product that allows first-time buyers to get on the ladder without a deposit is the Barclays Springboard mortgage, albeit this requires family and friends to help with the deposit.

In this case, the helper provides a 10 per cent deposit as security for five years and it’s placed into a Helpful Start account that earns interest and is returned after five years.

However, it is thought that there has been limited uptake for these types of products.

How expensive will they be? 

The other concern shared by some across the mortgage industry is the fact these products will likely come with higher rates, given there is greater risk for the lender.

The average five-year fixed rate mortgage rate for someone buying with a 40 per cent deposit is is 4.83 per cent, compared to 5.44 per cent for someone with a 5 per cent deposit, according to Moneyfacts.

That’s the difference between paying £1,149 a month and £1,221 a month, based on a £200,000 mortgage over 25 years. 

The rates on a 1 per cent deposit would likely be even higher for those buying with a 5 per cent deposit. 

Peter Stimson, head of product at MPowered Mortgages says: ‘With virtually no deposit, the price of these mortgages will be considered as risky business by lenders.

‘This will be reflected in the rates, which in all probability sit well above 6 per cent.’

Mortgage broker Mark Harris adds: ‘While there has been no detail on rates yet, as a comparison, Barclays Mortgage Guarantee product (95 per cent loan-to-value) is pegged at 5.56 per cent. 

‘Barclays Spring Board mortgage is 5.99 per cent. We would expect a 99 per cent mortgage to be premium priced for the elevated risk, cost of guarantee and so on.’

Rising house prices 

Government interventions such as these often appear to add fuel to house prices.

Stamp duty holidays, Help to Buy, Right to Buy and other schemes were also all meant to help more people on to the ladder.

But while many of those initiatives were successful, they also had the effect of pushing up house prices further for those that came after.

Jeremy Leaf, north London estate agent and a former Rics residential chairman, says: ‘While such mortgages may help first-time buyers who would otherwise be struggling with deposit raising, they are likely to boost demand which in turn may push up house pries, create greater negative equity risks and make trading up very expensive if rates fall.

‘To keep property prices in check, what is needed is a clear, deliverable programme aimed at increasing supply, which is implemented at the same time.’