The 99% mortgage – opportunity or obstacle?

By Jennifer Harrison, Content Lead

99% mortgages are not part of MPowered Mortgages’ proposition. This blog serves for educational purposes only.?

Do you want to purchase a new home but are struggling to save the deposit? A 99% mortgage could be the key to unlocking homeownership, but they do not come without drawbacks. In this blog we’ll look at the pros and cons of higher loan to value mortgages.?

Earlier this year, rumours were circulating regarding the launch of a government-backed 99% mortgage scheme; there has been huge demand for more support for first-time buyers for some time. Although Jeremy Hunt did not announce any government support for 99% mortgages back in March, this hasn’t prevented certain lenders from launching such a product for applicants who meet certain criteria. Here, we’ll explore 99% mortgages in more detail and what they could mean for you.?

What is a 99% mortgage??

A 99% mortgage is where a mortgage lender gives you a loan worth 99% of the value of your property, meaning you only have to find a 1% deposit. With the average UK property valued at ￡282,000 (correct as of Jan 2024), you would only need to save ￡2,820 to have a 1% deposit.??

For many potential first-time buyers, saving a big enough deposit to be able to get onto the property ladder has become increasingly difficult in the wake of the ongoing cost-of-living crisis. Lowering the deposit requirement will make homeownership much more achievable for many people struggling to save a large sum, particularly for those also contending with ever-growing rental rates. However, whilst the idea of a mortgage product designed to help buyers purchase their first property might initially sound like a dream come true, this is not a notion that comes without drawbacks. Additionally, whilst a 99% mortgage means you won’t need to save such a big deposit, you will still have to account for the other costs that come with obtaining a mortgage. For example, solicitor’s fees, stamp duty and the costs of moving home. You can read more about these costs in an earlier blog, ‘The cost of buying a house’.?

What are the risks associated with 99% mortgages??

Mortgages with a higher LTV are generally considered to be higher risk by mortgage lenders and 99% mortgages and other similar products can come with several disadvantages including:??

Possibility of negative equity?

If you take out a mortgage with just a 1% deposit, you will have very little equity in your home once you complete your purchase. This means that if house prices drop, even just a little, you’re likely to end up in negative equity – meaning that the property’s value is now worth less than your outstanding mortgage amount. However, the impact of this problem is reduced if you’re planning to stay in the property long-term as, often, house prices will recover over time. You can also help diminish the chance of negative equity by overpaying on your mortgage each month, provided that your lender permits this.??

High interest rates?

Another downside to securing a mortgage with a high LTV is that lenders will view you as higher risk and, therefore, any products with low interest rates may not be available to you.??

Strict criteria?

One more negative that comes with a high LTV mortgage is that, because of strict criteria conditions. It is likely that, to secure a 99% mortgage, your application would be assessed more thoroughly – and with tougher affordability tests – than that of an applicant putting down a 10% deposit. Whilst this does lower the risk of borrowers over-stretching themselves, it also means that not everyone will be able to access this sort of product.??

The rumour of 99% mortgages caused a lot of debate within the industry, with arguments for and against such products being widely shared. Is it wise to allow someone who cannot save enough money for a 5% deposit to take on a significant amount of debt, especially when the housing market is so volatile? Could the availability of high LTV may cause more harm than good by increasing the demand for housing, without doing anything to solve the housing supply problem that has plagued the UK for the last few years. But, on the other hand, should we completely dismiss a mortgage product that could be one of the few ways homeownership becomes viable for the next generation of first-time buyers??

At MPowered we always recommend seeking the advice of a reputable mortgage advisor as they will be able to guide you and find you a deal that is suited to your circumstances. You can read our list of reasons as to why you should use a mortgage broker, as well as lots of other informative content, on our blog page.??

All information contained on this blog is for general information use only. It does not provide mortgage advice and should not be construed as being mortgage advice, which can be provided by your mortgage broker and advisor only.