What 99% mortgages can mean for starters… and the housing market

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

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

The government plans to offer banks financial guarantees to encourage them to provide mortgages covering 99 percent of a home’s value.

This would be similar to the existing mortgage guarantee scheme, which aims to help people buying homes with a 5 per cent deposit.

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

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

How could it help starters?

There are few details about the scheme, but in theory it should mean aspiring homeowners can buy their first home with an even smaller deposit.

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

Under the new scheme they may only need £3,000, in addition to the money needed for a lawyer, surveyor and possibly a mortgage broker.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said: ‘Any scheme that helps people who want to move from ‘generation rent’ to ‘generation own’ is to be welcomed.

‘If starters have difficulty getting on the ladder, it has a domino effect on the rest of the market, because it cannot function properly. But as with everything, the devil is in the details.

“If people can afford mortgage payments but have difficulty saving for a down payment due to high rents, then a 99 percent option makes sense, but it must be carefully underwritten.”

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

According to the Office of National Statistics, house prices in Britain fell by 1.4 percent last year.

Negative equity exists if the home becomes worth less than the residual value of the mortgage.

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

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

‘A 99 percent mortgage is essentially a 100 percent mortgage; the 1 percent deposit hardly contributes to preventing losses.

‘This approach puts borrowers at significant risk of ending up in negative equity and encourages poor financial decision-making.

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

‘Do we really need to saddle starters with even more debt at a time when climbing the housing ladder is already quite a challenge?’

Tomer Aboody, director of property provider MT Finance, added: ‘The concern with almost 100 per cent mortgages is that there will be a return to the financial crisis, where borrowers in reality could not afford to buy their homes and there was a dip. is in the mortgage interest. income or possible job losses, affordability decreases.

“Any market dip then erodes equity, leaving borrowers unable to refinance.”

Will it make real estate more affordable?

Buyers will likely find that their ability to get a mortgage with a 1 percent down payment depends on their income.

Many first-time buyers are priced out of the real estate market not only because of the down payment required, but also because of the amount they can borrow.

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

This is a limit on the amount banks will lend based on the borrower’s annual income. They can offer some loans above this level, but there are strict limits on the number.

As a general rule of thumb, 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, he or she would normally need an annual income of at least £66,000.

Moreover, mMortgage lenders are conducting a stress test to check whether they can still afford their repayments if mortgage rates rise when their initial fixed rate expires in two to five years.

For example, with a two-year interest rate term of 5.5 percent, a lender can stress test the borrower’s ability to pay 8.5 percent, or with a five-year fixed rate, it can stress test at 7.5 percent.

If the borrower does nothing after the initial fixed period and falls into 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 limit the maximum amount someone can borrow.

Would it be popular?

There are some questions about whether many first-time buyers would actually sign a 99 percent mortgage deal.

According to UK Finance, the average deposit made by a first-time buyer last year was around 25 percent.

Meanwhile, the average first-time buyer borrows 3.36 times his annual income, which is significantly lower than the maximum he would typically be allowed to borrow for.

This suggests that buyers don’t want to overextend themselves when it comes to buying their first home.

Are comparable mortgages already available?

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

Another product that can help first-time buyers get on the ladder without a deposit is the Barclays Springboard mortgage, although this 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 it is placed in a Helpful Start account that earns interest and is repaid after five years.

However, there is thought to be limited adoption 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 are likely to have higher interest rates as there is greater risk to the lender.

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

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

Rates for a 1 percent down payment would likely be even higher for those purchasing with a 5 percent down payment.

Peter Stimson, head of product at MPowered Mortgages, said: ‘If there is virtually no down payment, the pricing of these mortgages will be seen as risky business by lenders.

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

Mortgage broker Mark Harris added: ‘While there are no details yet on rates, the Barclays Mortgage Guarantee product (95 per cent loan-to-value) is set at 5.56 per cent.

‘Barclays Spring Board’s mortgage is 5.99 per cent. We expect a 99 percent mortgage to have a premium price because of the increased risk, warranty costs, and so on.”

Rising house prices

Government interventions like these often seem to increase house prices.

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

But while many of these initiatives were successful, they also had the effect of further increasing house prices for subsequent initiatives.

Jeremy Leaf, a north London estate agent and former chairman of Rics Residential, said: ‘While such mortgages may help first-time buyers who would otherwise struggle to attract deposits, they are likely to boost demand, which could in turn hurt house prices. to rise. lead to greater negative equity risks and make top-ups very expensive when interest rates fall.

‘To keep real estate prices under control, a clear, actionable program aimed at increasing supply is needed, implemented at the same time.’