The government could launch 99% mortgages to support first-time buyers
Posted onOn 6 March 2024, chancellor Jeremy Hunt will deliver the Budget. There’s speculation that one of the key announcements will be the introduction of 99% mortgages to help aspiring first-time buyers secure a property.
While it could be good news for some prospective buyers, the proposal has been met with criticism by some experts and it wouldn’t solve all the challenges that first-time buyers face.
Soaring house prices mean first-time buyers could spend almost a decade saving a deposit
Traditionally, first-time buyers have put down a 10% deposit to take out a mortgage. Soaring property prices mean aspiring homeowners have found they need to save thousands of pounds while also potentially seeing their rental payments and other bills increase.
According to the Halifax house price index, the average property in the UK was worth more than £287,000 in December 2023. So, first-time buyers could need a deposit of around £28,000 to purchase the average home.
Of course, there are regional differences in property prices. Unsurprisingly, London is the most expensive region to buy a home, where average property prices exceed £528,000.
According to the Guardian, research suggested that in 2012, it would typically take 6.8 years to save a deposit for a mortgage. However, by 2023, this had increased to 9.6 years.
There are some mortgages available that may allow a first-time buyer to take out a mortgage with a 5% deposit, which might help them get on the property ladder sooner. The reports suggest Hunt could go one step further in the Budget.
The reported mortgage scheme means first-time buyers would need just a 1% deposit
While there have been no official announcements, reports suggest that Hunt and prime minister Rishi Sunak are considering a new government-backed scheme that would allow first-time buyers to take out a 99% mortgage.
It means first-time buyers could take out a mortgage with just a 1% deposit – under £3,000 for the average home in the UK. For many, it could mean they’re able to step onto the property ladder much sooner.
According to reports, the new scheme would be similar to the 95% mortgage scheme, which the government underwrites. This means the government takes on some of the risk to encourage lenders.
Low-deposit mortgages aren’t new. In fact, before the 2008 financial crisis, some first-time buyers could take out 100% mortgages, so no deposit was needed. There were even mortgages available on the market that were higher than 100%, which allowed homeowners to borrow more than the property’s value.
However, more stringent borrowing requirements and stress tests to assess a borrower’s ability to meet repayments, including if interest rates increased, mean these types of mortgages have been absent from the market for more than a decade.
First-time buyers could still face affordability challenges
Saving a property deposit is just the first challenge many first-time buyers face. A 99% deposit won’t help those who are struggling due to affordability.
Often, you can borrow up to 4.5 times your household’s annual income, although you may be able to borrow more through some lenders. With house prices rising at a faster pace than wages, some first-time buyers could find they’re unable to borrow enough to buy a home that suits them, even if they’ve saved a deposit.
With some experts warning that 99% mortgages could push house prices up even further, affordability could become a bigger obstacle to overcome.
Homeowners also need to consider the impact a mortgage would have on their budget. According to figures from the Yorkshire Building Society, mortgage costs now amount to 22% of all borrowers’ income – the highest proportion since 2008.
A 1% deposit could mean first-time buyers are at greater risk of falling into negative equity
Another factor first-time buyers would need to consider if they used a 99% mortgage is that they’d have a higher risk of falling into negative equity.
Negative equity means the value of your mortgage is higher than the value of your home.
With a 99% mortgage, you’d only hold 1% equity in your home so a relatively small fall in property prices could mean you end up in negative equity.
Historically, the property market has recovered from downturns over the long term. So, if you do fall into negative equity, making mortgage repayments and waiting for property prices to rise could put you back in positive equity territory. However, it could limit your options in the short term, especially if you want to move home.
We could help you secure a mortgage
If you’re a first-time buyer searching for a mortgage, we could help you. As a mortgage broker, we’ll take the time to understand your needs and assess which lenders could be right for you. Please contact us to speak to one of our team.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
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