Amit Gupta, Regional Manager at Capital Private Finance shares his thoughts around the new 99% Mortgage products hitting the market. Is it a lifeline for first time buyers (FTBs) or a wolf in sheep’s clothing?
Since the start of the year, the Government has teased the notion of lenders introducing 99% mortgage products into the market, aiming to assist First Time Buyers (FTB) in getting onto the property ladder. While this created an initial media buzz, many viewed this as political propaganda in an effort to win votes with an impending election and was unlikely to transpire due to certain risk considerations. However, Yorkshire Building Society (YBS) launched a 99% mortgage product at the end of March, sparking discussions about its implications.
A 99% mortgage product in this scenario, is whereby a FTB can borrow up to 99% of the property value, with a 1% deposit contribution from their own funds – subject to caps, criteria, and checks.
Understanding the Risks: Echoes of the Past
Before delving into the specifics of the YBS product, it's important to consider the broader benefits and potential risks associated with launching this product to market. The echoes of the 2008 global financial crisis loom large in discussions about mortgage lending. One of the key reasons for the crisis stemmed from irresponsible mortgage lending and lack of correct regulation, allowing people to borrow money – often without any deposit contribution – and limited affordability checks.
A dip in the US housing market then put people into negative equity and began a downward spiral of devastating financial repercussions across the globe.
Concerns and Comparisons: Pre-2008 Lending vs. Today
Whilst not quite the same, the introduction of a 99% mortgage product raises concerns reminiscent of pre-2008 lending practices. By allowing FTBs to purchase homes with only a 1% deposit It would mean that would-be buyers may not necessarily have a track record of evidencing financial responsibility and the ability to save.
By making it easier for people to buy houses it may lead to the next “housing bubble”. With house prices on average already at record levels, increased demand but a lack of supply it will mean that FTBs will likely overpay to obtain a property – requiring increased lending, more interest payable and increased risk exposure.
With average earnings not increasing at the same level as housing prices, and/or if we experience another extrinsic event such as the Covid-19 pandemic, it could indeed lead to increased default rates, and people entering negative equity – thus beginning the same negative housing spiral.
However, there is one key difference to pre-2008, which should prevent this. The regulatory and affordability checks required to obtain a mortgage, due to the 2014 Mortgage Market Review (MMR), means that borrowers should be more resilient to market fluctuations, with possible default rates being lower, regardless of deposit contribution. Yet, whilst more stringent affordability checks are in place, we do need to continue to be mindful that it does not mean they are completely infallible. Assuming lenders do undertake the correct affordability checks and lend responsibly, it should ease concerns across the market.
Government and Lender Motivations: Addressing Rental Market Pressures
Government and lender motivations for championing 99% mortgages stem from the pressures facing the rental market. High rental rates, coupled with a shortage of rentable housing stock, underscore the need to alleviate demand by facilitating homeownership.
It has been well publicised that rental rates in the UK are at a record high, fuelled by a lack of rentable housing stock, and difficulties for people to obtain a mortgage to meet the needs of an ever-increasing population.
One way to reduce rental rates and ease the financial burden on people is to reduce demand by getting more people onto the property ladder, and out of the rental market. Whilst it should be noted that owning a property is not right for everyone, and some people prefer the benefits of renting – such as the flexibility to move more frequently and possible reduced property upkeep costs – for many it is an aspiration to own their own home.
Assuming the mortgage is paid off at the end of the term, it would mean that people not only have a home, but a tangible asset that can be used when factoring for retirement planning. This, in turn, will ease financial burdens on the Government in the longer term.
Assessing the Solution: The YBS Example
In theory, making it easier for people to own their home benefits both individuals and society. But are the new 99% mortgage options the solution?
Let's take the example of the YBS product…
Currently, this option is only available for houses, not flats, and not applicable to new build property. There's also a cap on the property value of £500,000. While this might work well in large parts of the country, it could be limited in densely populated areas such as London and the South.
To qualify for borrowing up to £495,000 with just a £5,000 deposit, a household would need an income exceeding £100,000 per year. And considering the UK average annual income is around £33,000, this seems unlikely for most. This means that with flats being excluded, the option to buy a house may not be feasible.
Moreover, applicants would need a near-perfect credit score, which might be challenging for first-time buyers who have limited credit history.
While these limitations might exclude some FTBs, YBS and similar lenders should be acknowledged and commended for their attempted innovation, as it means that some FTBs will be able to access these products and realise their dream of homeownership.
It's important for lenders to continue working with the government to find ways to help people onto the property ladder, considering the various challenges faced by first-time buyers.
At Capital Private Finance, our expert advisers are well versed on these new mortgage schemes and are on hand to talk clients through their eligibility and/or look at alternative options best suited for their individual circumstances.
Author:
Amit Gupta
Regional Manager, Capital Private Finance
