Jeremy Hunt is said to be drawing up plans for a 99 per cent mortgage scheme backed by the government, which he will unveil at the budget in less than two weeks. The government is doing its best to show that it is the party for first-time buyers. But is it?
In a year where house prices are expected to fall, I can’t think of many ideas that are worse than taking out a 99 per cent mortgage. Do this and you will almost certainly fall into negative equity, a homeowner’s worst nightmare.
You are in negative equity when the value of your home loan is greater than the value of your property. The financial advice website Moneyhelper estimates that there are about half a million properties in negative equity in the UK. And the smaller the deposit you put down on a home, the more you are at risk.
Say, for example, you bought a property for £150,000. If you put down a 10 per cent deposit of £15,000 and took out a mortgage of £135,000, then the value of the house would have to drop £15,000 before you were in negative equity. While not unprecedented, house price falls of 10 per cent within short periods of time are unusual.
The last time we saw anything like that was during the financial crisis. In the 12 months to February 2009 house prices fell 15.6 per cent, according to the Office for National Statistics.
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Negative equity was a huge problem in the aftermath of the global financial meltdown because some people had been allowed to take out 100 or even 110 per cent mortgages. In some parts of the country, house prices are yet to recover from the plunge they took at that time.
This makes the prospect of larger mortgages even more worrying. If you had a 99 per cent mortgage on the same £150,000 house, its value would have to fall just £1,500 to leave you in negative equity — a far more likely scenario. House prices fell 2.1 per cent in the year to October.
Why is negative equity a bad thing? Technically it should only be a problem if you want to sell your home. Otherwise, just as with an investment, it is only a “paper loss” — it is theoretical, although still demoralising.
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But it can also be an issue if you need to remortgage. Most lenders won’t give you a new deal if you are in negative equity, which means that you end up stuck on their standard variable rate (SVR), which is typically considerably more expensive than any other deal. The average SVR is 8.32 per cent, compared with 5.56 per cent for the average two-year fix.
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There are two ways to get out of negative equity: wait for house prices to recover, or overpay on your mortgage to try to claw back some equity. The latter becomes much harder at a time of high or rising interest rates, when you may be finding it difficult to meet monthly repayments anyway.
Helping generation rent — and appealing to younger voters — is a priority for the government ahead of the spring budget, which is slated to be on March 6. But I’m not sure that saddling a generation with even more debt qualifies as helping.
The average house price is £285,000. A 99 per cent mortgage on this amount means you could buy a house with a deposit of £2,850. But here’s the rub: you would be taking on debt of £282,150.
At an interest rate of 4.5 per cent over a 25-year term, the amount you would end up repaying on this loan is £470,484. That’s assuming you never move to a larger property and take on more debt along the way — which, let’s face it, you probably will.
It’s a colossal millstone around a young person’s neck. No wonder the Banks of Mum and Dad and Granny and Grandad so frequently step in.
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Crucially, these initiatives which force lenders to loosen the purse strings do not solve the problem. If anything, they exacerbate it. Stoking demand without addressing the lack of supply only pushes house prices further out of reach of the first-time buyers that these 99 per cent mortgages and other schemes purport to help. Remember Help to Buy?
These schemes are dreamt up on the fallacy that house prices will rise in a straight line, forever, in all parts of the country, for all types of property. But we know that this is not the reality. The idea that interest rates will stay low is also not true, as we have learnt over the past year.
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Even if house prices don’t fall, it takes a long time to build up equity in a home. And the best mortgage rates are reserved for those with a 40 per cent deposit. Homeowners with tiny deposits are destined to remain stuck in a cycle of higher rates and expensive repayments.
At what point will they ever clear their debt? Lenders are becoming more flexible, and many will let you borrow into your seventies or eighties and beyond, but do you really want to retire and still be paying your mortgage?
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To solve this, politicians and lenders will need to come up with something more innovative than a bigger mortgage. The choice cannot be between a huge debt or renting for life.
