My girlfriend and I are looking to buy a home for £250,000. We are a couple in our late 20s and have a joint income of about £80,000, although we both have chunky student loan debts to pay off.
We have very little in savings so thought that ruled us out of buying a home for the moment.
But we have recently seen something about 99 per cent mortgages which look interesting.
What lenders offer these deals and what are the hoops we’d have to jump through to get one? Are they much more expensive than other mortgages?
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For example compared to the mortgage we might get with a 5 per cent or 10 per cent deposit.
We have £5,000 saved up currently, should we try and get to £12,500 for a 5 per cent mortgage or crack on? What are the dangers of going for the 1 per cent deposit option?
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David Hollingworth replies: In your case, the mortgage affordability calculations aren’t going to be slowing you down, assuming that your outgoings and commitments are typical.
In your case, the brake on buying is the need for an adequate deposit. However, as you’re able to support the mortgage, a smaller deposit requirement could really help.
Mortgage deals offering 100 per cent of the purchase price or more were widely available but dropped away following the financial crisis.
The typical minimum deposit requirement in the current market is 5 per cent of the purchase price.
New alternatives
Given that the deposit is such a problem area, lenders have looked to develop options.
Many have tended to harness parental help but more recently there’s examples of products that could offer alternatives without the need for the Bank of Mum and Dad.
The concept of 99 per cent mortgages was trailed as a potential solution ahead of the Spring Budget, to encourage more mortgage options.
A government backed scheme never materialised but Yorkshire Building Society, and its broker brand Accord Mortgages, has subsequently launched a product that can offer up to 99 per cent of the purchase price.
Its so-called £5,000 deposit mortgage requires a minimum of, you guessed it, a £5,000 deposit.
Available on properties up to £500,000 that could equate to as little as 1 per cent of the purchase price, although would represent 98 per cent loan to value in your case.
It is only available on existing houses, not flats, or on new build properties. At least one applicant must be a first-time buyer and there can be no other properties in the background.
> Is a two-year fix mortgage still a good bet?
Skipton Building Society also offers an innovative Track Record deal enabling as much as 100 per cent loan-to-value (LTV) lending for those that can demonstrate 12 months of rental payments that are higher than their mortgage payment will be.
Pros and Cons
The big plus point of any high LTV deal is that it could accelerate your chance of buying.
Saving for a smaller deposit could allow you to purchase sooner, something that’s even more important when house prices are climbing and could get further out of reach.
The rates on higher LTV deals will be higher than for those with a bigger deposit. The Yorkshire BS and Accord deal is currently 6.39 per cent, Skipton’s is at 5.55 per cent and the lowest five year fixes at 95 per cent are nearer to 5.3 per cent or even a touch lower.
A 10 per cent deposit would see the best rates dropping below 5 per cent.
> True Cost Mortgage Calculator: Check what a new fixed rate would cost
The balance to higher rates is how long it could take to save. Using something like the Lifetime Isa can help to boost savings with the government adding 25 per cent, if used for a first purchase or towards retirement.
It’s important to budget for other costs of buying including survey and legal fees plus the cost to move. You’d also ideally have a cushion to fall back on in case of any other unforeseen expenses.
A small deposit does increase the chance of negative equity if prices slide. That is mitigated by the fact that the mortgage will need to be on a repayment basis so the outstanding mortgage will reduce over time.
The rates on these products are fixed for five years which also removes the ups and downs of any rate fluctuation.
Your decision will have to come down to a balancing act of cost versus the time it could take to save a bigger deposit.
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