Are 99% mortgages a good idea?
Words by ITV News Producer Hannah Ward-Glenton
Yorkshire Building Society has launched a 99% mortgage product that allows first-time buyers to get onto the property ladder with a deposit of £5,000.
The average deposit paid by a first-time buyer based in the UK for a three-bed home in 2023 was £34,500 for a £240,000 home, according to Zoopla data. That amounts to a 15% deposit for the property.
So what is a 99% mortgage, who is eligible, and is it a good idea?
What is a 99% mortgage?
A 99% mortgage is when a buyer only needs to put down a deposit worth the equivalent of 1% of the value of the property they are looking to buy.
The bank will then lend the remaining value of the property, to be paid back over a fixed period of time, with a fixed interest rate.
Yorkshire Building Society has got some caveats in place, and the mortgage deal is only available under the following conditions:
The applicant must be a first-time buyer;
There must be a minimum deposit of £5,000;
The property can be worth up to £500,000;
The mortgage loan can be worth up to 99% of the property's value;
The mortgage is not available for flats or new build houses;
The mortgage is not applicable to properties in Northern Ireland;
If applying for a joint mortgage, neither person can currently own a property and both people must be aged 70 or under at the end of the planned mortgage term.
Why is it helpful?
It has become increasingly difficult for young people to get onto the property ladder as soaring house prices and the higher cost of living makes it harder to save large sums of money.
Being able to buy a property with a smaller amount of money should make it easier for more people to get a mortgage.
"A minimum deposit of 10% was [typically] required," chartered financial planner and founder of The Female Advisor, Rowena Griffiths, told ITV News.
"In the South East, this could easily be £40-£50K which is a struggle to save, especially with correspondingly high rents."
Mortgage products offering low deposits should get the property market moving, she added.
What are the risks?
One of the biggest risk of a 99% mortgage is the possibility of slipping into negative equity, which is when your property is worth less than the remaining value of your mortgage. This typically happens as the market moves, causing house prices to go up and down.
"In short, putting down a 1% deposit means that your property is at the most risk of falling into negative equity with even some of the smallest market fluctuations," Tayo Oguntonade, co-founder of property and financial literacy company Brickzwithtipz.
"Any property with a mortgage inherently has some risk of negative equity but the lower deposit you put down the lower the initial equity you have meaning you will be at greater risk of negative equity."
Are 99% mortgages a good deal?
Putting down a larger deposit typically results in better interest rates, as you are seen as being more financially reliable by the bank, which results in smaller monthly mortgage payments.
With 99% mortgages allowing you to put down such a small deposit, you are unlikely to secure the best interest rates.
Senior mortgage broker at The Mortgage Mum, Sonya Matharu, said the decision to take on such a big loan "requires careful consideration" and that while it is "generally wise" to contribute a higher deposit for long-term cost effectiveness, it can be a good option for people struggling to build a big deposit.
"As always, it's important to consult a reputable mortgage broker who can offer comprehensive advice tailored to individual circumstances," she said.
Are they suitable for everybody?
High loan-to-value mortgages can be a "valuable option" for people who may not be able to build a larger deposit, according to Rachel Springall, a finance expert at Moneyfactscompare.co.uk.
"First-time buyers may utilise these options to help get them on the property ladder," she said, but added that it is always better to overpay on a mortgage if you can in order to gain more equity.
You can then aim to reach a lower loan-to-value bracket to get a cheaper deal when refinancing.
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But the mortgage offer might not be suitable for all first-time buyers, Ms Griffiths told ITV News.
"[For example] buyers in insecure jobs (lots of gig economy workers!) with little savings i.e. the typical market for these sort of products. Hopefully, the affordability checks now done by lenders will exclude these high risk buyers."
Lenders ask for proof of income to ensure that anyone looking to take out a mortgage will be able to afford the payments.
For example, for a loan that is more than 75% loan-to-value, Yorkshire Building Society requires your last three payslips plus the bank statement showing the salary credit from your most recent payslip.
Why are we seeing these kinds of deals on the market?
The 99% mortgage comes onto the market after no-deposit 100% mortgage loans were made available by Skipton Building Society last year.
It was thought to be the first time no-deposit mortgages had come back on to the market since 2008, when some building societies offered rates of up to 125%.
Those deals were quickly pulled from the market as the country fell into financial crisis.
A number of banks, such as NatWest, Nationwide and Santander, introduced 95% mortgages in April and May 2021 after the government announced a new mortgage guarantee programme encouraging high loan-to-value lending as they tried to get more first-time buyers onto the property ladder post-pandemic.
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