"It's encouraging to see lenders continuing to try to innovate in the mortgage market, even after the government abandoned its own plans to encourage lower deposit mortgages in the Spring Budget."
- Matt Smith, Rightmove’s mortgage expert
Yesterday, Yorkshire Building Society announced the launch of a new '£5k Deposit Mortgage', available up to 99% LTV.
The five-year fixed rate of 5.99% is available to first-time buyers only on a maximum property value of £500,000.
For someone taking out the typical £200,000 first-time buyer mortgage, this would mean a loan-to-value of 97.5%.
The government was widely expected to introduce a 99% LTV mortgage scheme for first-time buyers in this month's Budget, however later scrapped the plans. Many industry experts were critical of the proposals, warning that it could leave buyers exposed to negative equity.
Some responded to Yorkshire Building Society's new product with similar concerns, with MPowered Mortgages saying it "could create the next generation of mortgage prisoners".
Amanda Symes-Reeves, product manager at MPowered Mortgages, commented: "The 1% deposit aspect of such mortgages is completely pointless as the borrower could find themselves in negative equity should house prices drop. At a time when climbing the housing ladder is already a struggle, should we really be saddling first-time buyers with even more debt? The risk is that such mortgages will create the next generation of mortgage prisoners. We think therefore it is imperative that these mortgages are only available via qualified mortgage advisers."
Mark Harris, chief executive of mortgage broker SPF Private Clients, said that "product innovation is extremely welcome, particularly when soaring rents mean first-time buyers are finding it harder than ever to raise a deposit".
However, he added that there "always has to be a balance", stating that borrowers will "have to pass stringent affordability assessments and credit scoring, particularly if borrowing more than 95% LTV".
He continued: "There are also property exclusions, such as no flats or new-builds which don’t tend to fare as well in a property downturn, while there is a maximum property value limit of £500,000. First-time buyers must also take out a five-year fixed-rate product."
However, Harris also noted that more help is needed for first-time buyers without financial support, adding: “Ideally, there would be no need for borrowers to take on high levels of borrowing. However, not everyone has access to the Bank of Mum and Dad, and is it fair that if you are not in this position you can never realistically afford to get on the housing ladder but must rent indefinitely?
“The threat of negative equity is greater the higher the level of borrowing but with only five-year products available, hopefully over that period of time the value of the property will increase. There is no interest-only option so borrowers will be paying back a small amount of the capital as well as interest each month, improving their equity stake.
“Critics may question what will happen if the buyer loses their job and can’t afford their mortgage payments but the same rings true for renters. Not everyone can move back in with Mum and Dad."
Director of mortgages at Yorkshire Building Society, Ben Merritt, stressed that borrowers will "still have to demonstrate strong creditworthiness and pass an affordability assessment to be eligible for a £5k Deposit Mortgage", adding that "we have a duty to encourage financial responsibility in anyone taking out a mortgage".
Others responded positively to the launch, with Matt Smith, Rightmove’s mortgage expert, saying: "It's encouraging to see lenders continuing to try to innovate in the mortgage market, even after the government abandoned its own plans to encourage lower deposit mortgages in the Spring Budget. This new product has the potential to help some first-time buyers who fit the affordability criteria, but are struggling to raise a bigger deposit. The game-changer for first-time buyers will be an innovation, or regulatory changes, that helps with the challenge of raising a deposit, and being able to borrow enough from a lender, and there should be support for lenders who are trying to break the mould to help more would-be first-time buyers onto the ladder."
