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Are 99% mortgages for first-time buyers going to work?

Last Updated: 30-01-2024

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    It’s been a long time since we’ve seen 99% mortgages. Like many types of mortgage borrowing, the financial crisis put paid to such low-deposit finance. But now, Jeremy Hunt is considering bringing back 1% deposit home loans in the Spring budget.

    The decision has divided financial commentators. Some warn of instant negative equity. Others say it’s exactly what the market needs, especially in lieu of the disappearing Help-to-Buy scheme. 

    But what are the realities of low-deposit mortgages?

    What’s your beef; don’t we already have 100% mortgages?

    On the market at the moment we have two “100%” mortgages. First, and the most conventional, is Skipton’s ‘Track Record’. 

    Track Record uses a buyer’s history of meeting their rental payments as part of Skipton’s lending criteria. If their rent payment history meets those criteria, Skipton forwards 100% of the mortgage loan to the borrower.

    We also have Barclays’ ‘Family Springboard’ mortgage. Whilst it is 100%, it’s less conventional; it consists of two players: the borrower and their helper.

    The helper is, in a broader sense, a guarantor. They deposit 10% of the house purchase price into a Barclays Helpful Start Account linked to the borrower’s mortgage. The helper must then leave that 10% untouched in the Helpful Start Account, like a security, for five years.

    Once that 10% is in situ, Barclays then lends the borrower 100% of the house price via the Family Springboard Mortgage.  

    Where the 99% LTV mortgage differs

    The new government-backed 99% mortgages would differ from those two 100% options entirely. It would resemble the current 95% LTV mortgage structure, but would require only a 1% deposit.

    What I would expect, though, is for 99% mortgages to have (at least) these four characteristics:

    • potential borrowers must have 100% perfect credit;
    • affordability tests would show a certain buffer in disposable income;
    • lenders would only lend where house prices were stable, so any property would be subject to strict valuations;
    • interest rates will be incredibly high compared to 90% LTV mortgages.

    Industry experts may even question if these factors go far enough, given that house price deflation is still touted online. But will house prices falter, as predicted?

    Does a 1%-only deposit requirement lay to waste Halifax’s prediction of house prices dropping 2%-to-4% this year?

    It seems unlikely that house prices will reduce in the immediate future. This is especially true if 1%-deposit mortgages come onto the market. Here’s why:

    It’s a seller’s market

    For house prices to shrink, it has to be a buyer’s market. It’s not. There’s still a huge housing shortage, attempts at which to address have been laughable.

    Since December 2023, we’ve also seen an uptick in demand. Many homeowners, who’d taken out mortgage deals at between 1%-2%, had been waiting for interest rates to drop post-Liz Truss’s 2022 mini-budget. Once those rates breached 5% in December, many homeowners pounced.

    Demand has continued to be strong into 2024 and shows little sign of abating. The demand is there; the houses are not.

    A 1% deposit requirement will flood an already-saturated market

    One factor that’s reduced mortgage demand from renters is their inability to save a deposit in the face of spiralling rental costs. Once lenders reduce the LTV from 95% to 99%, you suddenly have a clutch of borrowers with a 1% deposit (or more) who might qualify for a mortgage.

    Again, you’d have more buyers vying for the same depleted housing stock. Prices would rise, making homes even less affordable for first-time buyers. 

    Are 99% mortgages a political gambit?

    The other question you’d have to ask is: would Jeremy Hunt offer 1% mortgages if he believed borrowers could, theoretically, be in negative equity by the time they move in?

    Instinct says, ‘No!‘. But—and I hate to tread into politics—this is the Conservatives we’re talking about. You wouldn’t put it past them to offer up this ‘solution’ purely to garner votes in the upcoming General Election.

    We’re close to recession, if not there already. Labour is 27% in front in the polls. The Conservatives are desperate to increase GDP and reduce inflation. Maybe this is a ‘shoot first, ask questions later’ Hunt punt at saving total annihilation at the polling booth.

    Will 99% LTV mortgages offer value?

    There’s a very real danger here. 1% deposit mortgages could cause such a rush that they push up house prices by more than the perceived value that 99% LTV mortgages deliver. That would be awful news for homeowners who’ve used the scheme.

    If there’s a housing bubble, which industry experts suggest there might be, it could cause problems. 

    Overpriced property could become subject to corrections in the following months and years. When the only difference between you and negative equity is 1%, it wouldn’t take much of a correction to put you in the red. 

    Even an indirect cost, like the impact of higher inflation further down the line, could stretch household budgets. That’s why lenders would have to adhere to stringent affordability checks for 99% LTV borrowers. 

    Location, location, location

    The other factor to consider is location. I’ve no doubt there’ll be a clause for buyers in London, but let’s look at recent history.

    House prices have grown much faster than wages, even with the recent corrections to earnings we’ve seen since the pandemic. But the gap between what many first-time buyers can afford even at 99% and the cost of the most affordable homes is considerable.

    Are 99% LTV mortgages too big a leap to achieve what the Chancellor hopes they will? 

    Everything comes back to this: affordable housing

    First, the government needs to address the shortage thereof. Without an all-round housing strategy, efforts to get first-time buyers onto the property ladder lack cohesion. Perhaps that’s fitting, as it surely will be the epitaph of the current government’s tenure.

    Author: John Yerou

    John Yerou is the owner and founder of the award-winning Mortgage Quest Ltd and its subsidiary brands.

    In 2004, John began his career in financial services as an independent mortgage advisor and broker. He's since been instrumental in negotiating bespoke mortgage underwriting criteria for professional contractors with many high street lenders.

    As such, John's one of the most respected and recognisable names in securing mortgages for the UK's flexible workforce, incorporating independent professionals and the self-employed.

    His recognition as the go-to mortgage expert has grown exponentially, reflected in citations and his own publications in both national and contractor-oriented press.

    Posted by John Yerou

    on January 29th, 2024 10:31am in Latest mortgage news & opinions.