“Getting on the housing ladder”. It’s a phrase which for generations has been an aspirational one for many young people living in the UK. However, with wages struggling to keep up with inflation, a lack of housebuilding, and rapidly escalating property prices, it is widely acknowledged to be increasingly difficult to buy your first property. Many solutions have been put forward, with the latest being 99% mortgages.
This idea has been reportedly considered by the government and may be introduced in the Chancellor, Jeremy Hunt’s Spring Budget on 6th March. But are 99% Loan to Value (LTV) mortgages a good idea? In today’s article, we take a look at the idea of 99% mortgages, examining the advantages and disadvantages for first-time buyers.
What is a 99% LTV mortgage?
Simply put, a 99% LTV mortgage means that a lender (bank or building society) gives a buyer a loan which is worth 99% of the price they are buying a property for. This means that for a buyer, they only need to put up a 1% deposit. If a property is worth £250,000, they would only need to put £2,500 towards the deposit. This is a far lower deposit than would be needed for a 5% or 10% deposit for example. As a result, a property with a 99% mortgage is far more affordable in terms of getting on the property ladder.
Some lenders are already offering 100% mortgages, which mean that the buyer doesn’t need to put down a deposit at all. Most of these are guarantor mortgages, however there are some which are largely based on your rental payment history.
Advantages of 99% Mortgages
A major difficulty for those who want to go from renting to buying their own home is high rental costs. Many who are currently renting are paying increasingly high rent to their landlords, particularly in UK cities like London. This makes it difficult to save, even though those individuals would be paying less for their mortgage than they currently are by renting. Therefore, 99% mortgages would allow first-time buyers to save less before purchasing their property.
While 95% mortgages are still available through the mortgage guarantee scheme, meaning that the government will cover the costs if the lender loses money, these deposits can still be very hard to save for. The reason for this is that house prices have soared in recent years, and the average cost for a home is now £288,000 as of June 2023. Meanwhile, the average wages has struggled to keep up.
There are also positives to be had for lenders, with a potentially bigger market available to them. Nevertheless, there are also potentially disadvantages when it comes to 99% mortgages. Let’s discuss these now.
Disadvantages of 99% mortgages
Despite the obvious benefits of 99% mortgages, particularly for those people who are looking to get onto the housing ladder, there are also some negatives to bear in mind.
For one thing, a 99% mortgage will naturally have higher interest rates than a mortgage with a lower LTV percentage. As a result, these mortgage holders will be paying a greater total amount in order to pay off the mortgage than a product with lower interest rates.
Higher interest rates may also mean that for some, they may find that the product puts them under financial strain. However, for those who are already renting, this may still be either a negligible difference or a much lower amount compared with their previous monthly rental payments.
There is also the possibility that 99% mortgages could leave these mortgage holders in negative equity if housing prices were to fall. This means that the outstanding balance on your mortgage is more than the house itself is worth. If this is the case, it can cause huge problems if you want to sell your home. Furthermore, it may also cause issues when your existing mortgage ends. Lenders don’t usually let mortgage holders switch to a new deal if they are in negative equity. Instead, they will usually be moved on to the lender’s standard variable rate, which tends to have a much higher interest rate.
Prior to the Great Recession of the late 2000s, banks were often lending 100% or sometimes even more of a property’s value. The financial crash resulted in thousands of mortgage holders being stuck in negative equity and stuck on high interest rates following the collapse of several lenders. Despite this, it is worth bearing in mind that the criteria for a mortgage from lenders is now much more stringent and based on affordability.
Finally, there has been concern from across the property industry over the impact that 99% mortgages could have on the market. With more people having the ability to buy a property, this could further increase demand while reducing supply if not enough new properties are built. After all, the lack of housing stock in the UK is already self-evident for many of those struggling to buy their first home.
Our thoughts
While the intentions of getting more people on to the housing ladder are a noble one, the idea of a government-backed 99 per cent mortgage scheme is not necessarily a way to address the root cause of the housing crisis. At the moment, there are a lack of affordable homes available, and this move would result in even greater competition between potential homeowners.
Nevertheless, despite the risks it may be a very popular move for young people, particularly in cities like London where the main difficulty with buying a home is saving enough for a deposit. A 99% government-backed mortgage would therefore potentially help to unlock a generation of new homeowners. We will wait and see whether the government decides to go ahead with this move in its upcoming Spring Budget, which will be the last one before the next General Election.
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