Can we really buy a house with a 1% down payment? DAVID HOLINGWORTH replies

My girlfriend and I want to buy a house for € 250,000. We are a couple in our late twenties and have a combined income of around £80,000, although we both have significant student debt to pay off.

We have very little savings, so we thought this rules us out from buying a house for the time being.

But we recently saw something about 99 percent mortgages, which looks interesting.

Which lenders offer these deals and what hoops do we have to jump through to get one? Are they much more expensive than other mortgages?

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Compared to the mortgage we can get, for example, with a down payment of 5 percent or 10 percent.

We currently have £5,000 saved. Should we try to get £12,500 for a 5 per cent mortgage, or should we carry on? What are the dangers if I choose the 1 percent deposit option?

David Hollingworth replies: In your case, the mortgage affordability calculations will not slow you down, assuming your expenses and obligations are normal.

In your case, the brake on purchasing is the need for an adequate down payment. However, since you can support the mortgage, a smaller deposit requirement can really help.

Mortgage deals that offered 100 percent of the purchase price or more were widely available, but disappeared after the financial crisis.

The typical minimum deposit requirement in today’s market is 5 percent of the purchase price.

New alternatives

With deposits being such a problem area, lenders have been looking for options.

Many tend to turn to parents for help, but recently there have been examples of products that could provide alternatives without the need for the Bank of Mum and Dad.

The concept of 99 percent mortgages was put forward as a possible solution in the run-up to the spring budget, to encourage more mortgage options.

A government-backed scheme never got off the ground, but Yorkshire Building Society and its estate agent brand Accord Mortgages subsequently launched a product that could offer up to 99 per cent of the purchase price.

The so-called £5,000 deposit mortgage requires a minimum of, you guessed it, a £5,000 deposit.

Available for properties up to £500,000, which equates to just 1 percent of the purchase price, although in your case this would represent 98 percent of the loan by value.

It is only available for existing houses, not for apartments, or for new-build properties. At least one applicant must be a first-time buyer and there must be no other properties in the background.

> Is a mortgage with a two-year term still a good choice?

Skipton Building Society is also offering an innovative Track Record deal that enables as much as 100 per cent Loan-to-Value (LTV) loans for those who can demonstrate they have made twelve months’ worth of rental payments in excess of their mortgage payment.

Pros and cons

The big plus of any high LTV deal is that it can increase your chances of buying.

Saving for a smaller down payment can help you buy sooner, something that’s even more important when home prices rise and could move further out of reach.

Rates for deals with a higher LTV will be higher than for deals with a larger deposit. Yorkshire, BS and Accord’s deal currently stands at 6.39 percent, Skipton’s is 5.55 percent and the lowest five-year fixes of 95 percent are closer to 5.3 percent or even slightly lower.

With a 10 percent down payment, the best rates would drop below 5 percent.

> True Cost Mortgage Calculator: Check what a new fixed rate would cost

The balance of higher rates is how long it can take to save. Using something like the Lifetime Isa can help boost savings, with the government adding 25 per cent, if used for a first purchase or for retirement.

It is important to consider other purchase costs, including investigation and legal costs, plus the cost of moving. Ideally, you also have a buffer that you can fall back on for other unforeseen expenses.

A small investment does increase the chance of negative equity if prices fall. This is mitigated by the fact that the mortgage must be on a repayment basis so the outstanding mortgage will reduce over time.

The rates on these products are fixed for five years, which also eliminates the ups and downs of any rate fluctuations.

Your decision will have to come down to a balance between the cost and the time it might take to make a larger down payment.