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

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 preparing to offer banks financial guarantees to encourage them to grant mortgages that cover 99 per cent of the value of a home.

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

If confirmed, the policy would certainly be welcomed by some first-time buyers.

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

How could you help first-time buyers?

There are few details about 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 plan, they may need as little as £3,000, plus funds for a solicitor, surveyor and potentially a mortgage broker.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘Any scheme that helps those who want to move from ‘rental generation’ to ‘own generation’ should be applauded.

‘If first-time buyers find it difficult to get on the ladder, this has a knock-on effect for the rest of the market as it cannot function properly. But as with everything, the devil will be in the details.

“If people can afford mortgage payments but struggle to save for a deposit due to high rents, then a 99 per cent option makes sense, but needs to be carefully supported.”

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

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

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

If that happens, the homeowner may not be able to remortgage and, in some cases, may be forced to sell their home to repay the bank.

Peter Stimson, head of product at MPowered Mortgages, says: ‘The Chancellor’s decision to introduce 99 per cent home lending 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 percent deposit does little to prevent 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 by a government promoting a nation of investors and savers.

“At a time when moving up the property 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 mortgages close to 100 per cent is whether there is a return to the financial crisis, when borrowers couldn’t actually afford to buy their home and there is a drop in income, or possible job losses, refers to affordability.

“So any market decline erodes capital, leaving borrowers unable to refinance.”

Will it make the property more affordable?

Buyers are likely to find that their ability to get a 1 per cent deposit mortgage depends on their income.

Many first-time buyers are not only priced out of the property market by the deposit required, but also by the amount they can borrow.

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

This is a limit on the amount that banks will lend based on the borrower’s annual income. They may offer some loans above this level, but there are strict restrictions on how many.

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

If a single person were to buy a £300,000 property with a 1 per cent deposit, they would normally need an annual income of at least £66,000.

Besides that, mMortgage lenders put borrowers through a stress test to see if they would still be able to afford their payments if the mortgage rate were to increase when their initial fixed rate ends in two to five years.

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

After the initial fixed period, if the borrower does nothing and falls into the lender’s higher standard variable rate (SVR), they should theoretically 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 is some doubt about whether many first-time buyers would actually sign a 99 per cent mortgage agreement.

The average deposit made 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 below the maximum they would normally be allowed to borrow at.

This suggests that buyers don’t want to put in too much effort when it comes to buying their first home.

Are there already similar mortgages available?

Skipton Building Society made headlines last year when it launched a 100 per cent mortgage for tenants to allow them access to the property without a deposit.

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

In this case, the helper provides a 10 percent deposit as security for five years and is placed in a Helpful Home account that earns interest and is returned after five years.

However, it is believed that there has been limited acceptance of these types of products.

How expensive will they be?

The other concern shared by some in the mortgage industry is the fact that these products will likely have higher rates, as 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 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 mortgage of £200,000 over 25 years.

Rates on a 1 per cent deposit would likely be even higher for those purchasing with a 5 per cent deposit.

Peter Stimson, head of product at MPowered Mortgages, says: ‘With virtually no deposit, lenders will view the pricing of these mortgages as a risky business.

“This will be reflected in rates, which are likely to be well above 6 percent.”

Mortgage broker Mark Harris adds: ‘Although there have been no details on rates yet, for comparison the Barclays Mortgage Guarantee product (95 per cent loan-to-value) is set at 5.56 per cent.

‘The Barclays Spring Board mortgage is 5.99 per cent. We would expect a 99 per cent mortgage to be priced higher because of the high risk, cost of collateral etc.’

Rising house prices

Government interventions like these often appear to increase housing prices.

Stamp duty holidays, Help to Buy, Right to Buy and other schemes were also aimed at helping more people get up the ladder.

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

Jeremy Leaf, a north London estate agent and former chairman of Rics residential, says: “While these mortgages may help first-time buyers who would otherwise struggle to raise deposits, they are likely to boost demand, which in turn It can also drive up home prices, create greater downside risks for stocks, and make upside trades much more expensive if rates fall.

“To keep real estate prices under control, what is needed is a clear and feasible program aimed at increasing supply, implemented at the same time.”