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Marginal equity mortgages are a step in the right direction for FTB support – JLM

by: Sebastian Murphy and Rory Joseph, group directors at JLM Mortgage Services, the mortgage and protection network
  • 03/04/2024
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Marginal equity mortgages are a step in the right direction for FTB support – JLM
To clarify at the very start of this article, we absolutely warmly welcome any new products that focus on the true needs of first-time buyers in today’s marketplace, and attempt to solve some of the big issues that they are unfortunately confronted with.

So, to have Accord offering what is ostensibly a 99% loan to value (LTV) mortgage to the market now, allowing those with a £5,000 deposit to get onto the ladder, for a property valued up to £500,000 is without doubt good news. We have no doubts that it will make the difference between buying and not buying for a number of first-timers.

This is especially heartening after the government’s 99% LTV scheme never happened, and you might also say that it proves there is a strong need here and lenders themselves, rather than the government, are best placed to act in this area. 

That said, there are – as some have already pointed out – some wider issues that we need to consider when it comes to such a product. 

 

Appropriate homes for new owners 

The first, and perhaps most pertinent, is the fact you can’t use it to buy a new build or any kind of flat or apartment, which, given first-time buyers are much more likely to want or need to buy these properties, is a significant issue. 

This is particularly the case for those in cities – in a sense, good luck trying to find a non-new build, non-apartment or flat to purchase in these key areas of the country. You might well argue that finding a £5,000 deposit is the least of these potential buyers’ worries, and instead it’s going to be finding a property that is acceptable to the lender. 

To our mind, that definitely needs a rethink, because we talk a lot about getting people into the right houses for them. First-time buyers often start their homeowning journey in a new build or an apartment, and to say this is not appropriate for them certainly sends the wrong message.

Perhaps it will be other lenders who can find a solution they are comfortable with here, offering a similar high LTV and more acceptable property types for first-time buyers. The challenge has been set.

 

A huge obligation for first-time buyers 

The second issue comes, of course, with the slim slice of equity the first-time buyer is securing if they only have a £5,000 deposit and they are looking to purchase the maximum priced property allowable of £500,000. 

In fact, you can probably make the same point for properties being bought at lower levels than this, and that is the issue of what we might call ‘marginal equity’. 

So, you take out a 99% LTV mortgage, you add on the fee for securing that mortgage, you take out a pretty long mortgage term, and you find that – unless house prices go up – you’re not likely to be paying much off that mortgage over a five-year period. 

Actually, on the fact this is a five-year fix, we know that some advisers don’t like this. This is because some first-timers do want to move relatively quickly and tying them into a five-year term presents issues. 

However, we don’t mind the five-year term because – and this ties into the point above – if they do have that slim amount of ‘marginal equity’, they might need the whole of that five-year period to benefit from house price rises, pay off some of that mortgage, and get to a point where they are in a position to remortgage. 

Of course, advisers and their clients do need to be aware that this might not be the way the five-year period pans out, and therefore unless there is a growth in the competition for these ‘sliver’ equity products, they might well find themselves needing 96%, 97% or 98% LTV mortgages at the end of the five-year period. 

If Yorkshire/Accord remain the only game in town for these products, then they’re likely to be stuck ‘product transferring’ with them for a while, certainly for their next mortgage, which might again only be offered for a five-year fixed rate term. 

Clearly, there is a lot to get to grips with for advisers with this product and the alternatives available to first-time buyers that might be a better fit for their needs.

However, another product option for those that do qualify is a positive, and we hope to see more lenders moving into this space, albeit with some positive tweaks that could make it appropriate for a wider borrower cohort. 

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