There are two main affordability challenges first-time buyers (FTBs) face. The first is saving up enough money for a deposit, a task which has become increasingly challenging amidst a cost of living crisis and record-breaking rental growth. The second is ensuring that their income is high enough to service monthly mortgage repayments and pass a lender's stress test.
While the idea of a 99% LTV mortgage helps with the first part, it doesn’t necessarily help with the second part. Higher mortgage rates have pushed income requirements upwards, meaning buyers have to earn more to borrow the same amount, in many cases limiting how much a first-time buyer can borrow.
Our analysis shows that while a 99% mortgage brings down the deposit requirement for the average FTB to just £2,370 – equivalent to roughly one month’s post-tax pay – they’re unlikely to meet affordability tests. The mortgage interest rate needs to be 3.89% for a typical first-time buyer to afford the repayments, 2% lower than the average 95% mortgage rate in March 2024 which was 5.89%. This means that at today’s rates, the typical first-time buyer with a 1% deposit could only afford to purchase a local home in 70 of the 370+ local authorities in Great Britain (GB).
To put it differently, the typical first-time buyer in Great Britain would need to earn an additional £10,200 a year to afford a 99% LTV mortgage at today’s rates. Or, the price of the average home bought by a FTB would need to fall by £48,000 to bring affordability within reach.
For this analysis, we’ve assumed that the buyer earns the typical FTB salary in their area and they purchase the average FTB home (typically 16% cheaper than the local average). Across Great Britain, the average first-time buyer earns £39,734 and is likely to purchase a home costing £236,640.
We’ve assumed that they’re stretching their mortgage over a 30-year repayment term. However, many first-time buyers are extending this term even further to keep monthly payments down. The average first-timer taking out a 99% LTV mortgage over 35 years could afford a rate of 4.47%. At 40 years – the longest term available – the rate could be as high as 4.83%. Although these sorts of terms could meaning repaying deep into retirement.
To avoid buyers over-extending themselves and struggling to make their repayments, most lenders are hesitant to give out loans that would take up more than a third of a buyer's pre-tax income.
North-South Divide
The reality is, that a 99% LTV mortgage is unlikely to work across the country. With rates where they are today, most single first-time buyers in the South of England would struggle to afford a 99% LTV mortgage, creating a North-South divide.
The mortgage rate would need to be at, or below 1.18% for a single FTB in London to be able to afford a 99% LTV mortgage. Or, they would need to earn an extra £41,800 annually, almost double the current average.
Meanwhile in the North East, the most affordable region in the country, the typical first-time buyer with a 1% deposit could afford a mortgage rate as high as 7.52%.
One way to boost borrowing power is to purchase a home with someone else. Assuming both work full-time and earn the same salary, a couple could afford to buy the average home in Great Britain with a 99% LTV mortgage even if mortgage rates doubled from where they are today. This could bring cheaper areas in London into consideration. Doubling incomes means the maximum affordable rate for a couple in the capital with a 1% deposit goes up to 6.92%, surpassing today’s typical 95% LTV rates.
The risk of negative equity
Buying with such a high LTV does raise the risk of falling into negative equity. This happens if house price falls mean the outstanding mortgage exceeds the value of the property.
This is one of the reasons why lenders generally only offer 95% mortgages with a minimum five-year fixed term, reducing the impact of any house price volatility. Provided prices don’t move too much, with a 5% mortgage rate, a buyer will end up with almost 10% equity in their home after five years’ worth of repayments, reducing their chances of falling into negative equity.
Looking back at historical price growth across England, there’s only been one instance since 2000 when average house prices fell over a 5-year period. This occurred for those that bought in 2008, just before the financial crash, and sold in 2012 when the market was still recovering. Over the last decade, 5-year house price growth has averaged 24%, reducing most first-time buyers LTV’s. There are, however, variances across the country and for different property types.
Is there a future for 99% LTV mortgages?
With rates where they are, 99% LTV mortgages are unlikely to have broad-based appeal among first-time buyers due to the prohibitively high-income requirements. In reality, these loans are unlikely to help first-time buyers in the most unaffordable parts of the country which tend to be in the South of England. To get the sums to stack up, the government would need to subsidise mortgage rates for first-time buyers, although the politics of doing so may be more complicated.
