Earlier today, Yorkshire Building Society launched a £5,000 Deposit Mortgage, both direct and through its intermediary brand Accord Mortgages, to help first-time buyers get onto the property ladder.
The move has been broadly welcomed by brokers, but they have said first-time buyers need to be aware of affordability, property exclusions and the potential for negative equity, although the latter has been mitigated.
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”.
He said: “There always has to be a balance, however, and borrowers will have to pass stringent affordability assessments and credit-scoring, particularly if borrowing more than 95% loan to value (LTV).
“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.”
Harris said that such high levels of borrowing should not be necessary, but many did not have access to the Bank of Mum and Dad, and those without such options would have to “rent indefinitely”.
“The threat of negative equity is greater, and 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,” he noted.
£5k Deposit Mortgage ‘definitely innovation’
Chris Sykes, technical director at Private Finance, said that the £5,000 Deposit Mortgage was “definitely innovation” and “will be key for many first-time buyers to get on the ladder where perhaps it was seemingly impossible for them before”.
He said that it didn’t have stress tests like Skipton Building Society’s 100% LTV mortgage and do not require any parental help, but did have a “slight premium” at 5.99%. However, given that the majority of five-year fixed rates currently are between 5% and 5.3%, it was an “understandable premium”.
He said: “Accord have done a good job at building in specific caveats to minimise negative equity risks. For example, they specify no interest-only, no flats or new builds. Accord already has 100% and negative equity refinance products for existing borrowers, acting as a backstop for borrowers if they do enter negative equity.
“This is reassuring for new borrowers as they will be protected against being on a standard variable rate [SVR] if they fall into negative equity. Traditionally, Accord is a flexible manual underwriting lender, so they are well-suited to bring out this type of product as it will help more people.”
Sykes said that there were some risks that first-time buyers should be cautious of.
“Mortgages with higher-LTV ratios tend to incur greater costs due to the inherent risk of negative equity. We would love to see this type of low deposit scheme tied in with lenders similar to Perenna’s ultra-long-term fixed rates (accompanied by appropriate break clauses) to avoid risks of becoming a mortgage prisoner.
“By offering this product with a minimum five-year fixed period, Accord allows borrowers time to navigate any fluctuations in property prices and for the mortgage balance to decrease with their monthly payments.
“This is likely to increase the possibility that the mortgage is at a lower LTV and can be refinanced at the end of the five-year period, thus mitigating the risk of negative equity,” he added.
High earners and borrowers with good credit score likely borrowers
Nicholas Mendes, mortgage technical manager and head of marketing, said that those that would benefit from the £5,000 Deposit Mortgage product are “likely to be high earners and prospective buyers with a good credit score that just simply haven’t been able to save a deposit amid high rents”.
“That said, while it’s encouraging to see lenders launch new products and expand their existing criteria, sometimes these don’t always have the same impact, especially when we consider comparable options in the market that help borrowers overcome affordability and/or deposit barriers.
“For example, Skipton Building Society’s Track Record mortgage, Barclays’ Springboard or even the recent Own New proposition all support the first-time buyer and homemover market with fewer caveats and, in some cases, cheaper rates,” he noted.
Matt Smith, Rightmove’s mortgage expert, said that it was “encouraging to see lenders continuing to try to innovate in the mortgage market” with this £5,000 Deposit Mortgage, even if the government had set aside its plans for a 99% scheme mortgage scheme 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,” he said.
Matthew Poole, director of Poole Family Financial, agreed that it is “great that we are seeing lenders bringing innovative ways to help the first-time buyer market”.
“As with all initiatives, prospective buyers need to be made fully aware of ins and outs. This scheme will appeal to a number of first-time buyers and likely those who are on a decent income, but find themselves in the renting cycle where it is hard to save for a deposit.”
Regarding the £5,000 Deposit Mortgage, he said: “The biggest fear on this particular scheme will be the potential for negative equity. Should house prices fall, there is a greater risk of this when a minimal deposit is being put down. This could then lead to problems trying to remortgage in the future.”
Poole continued: “On the other side to this, it opens up the possibility of bringing homeownership within reach for people who otherwise thought it would be impossible. A really interesting proposal, and certainly one I will be keeping an eye on for prospective buyers.
“As always with these types of scheme, it won’t be a free-for-all, and applicants will need to go through thorough affordability checks and will need to have a strong credit score/profile.”
