1% mortgages: New £5,000 deposit mortgage allows homeowners to borrow up to 99%
RVU Brands respond to the news of 1% mortgages: New £5,000 deposit mortgage allows homeowners to borrow up to 99%.
In the last 24 hours, Yorkshire Building Society announced its new fee-free deal which will enable first-time buyers across England, Scotland and Wales to purchase a property valued up to £500,000 with a £5,000 deposit – therefore, acting as a 1% mortgage.
In response, mortgage experts at RVU brands – Mojo Mortgages and Uswitch – have shared how this is likely to impact the market, mortgage borrowers as well as the potential downsides of 1% mortgages.
What impact will 1% mortgages have on the property market?
Claire Flynn, a spokesperson for Mojo Mortgages, said:
“The introduction of 1% mortgages might initially seem like a positive move, offering a pathway for more first-time buyers to step onto the property ladder with a smaller deposit.
“However, while the mortgages may indeed assist first-time buyers in joining the property ladder due to a much smaller deposit requirement, it’s predicted that this sudden surge in demand could drive up house prices overall.
“Historically, government initiatives such as Help to Buy and Stamp Duty Holidays were created to support buyers, however, they inadvertently fuelled a staggering rise in house prices.
“10 years ago, the average house price sat at £188,265, however, today, it’s around £281,913, a substantial increase of £93,648.
“Therefore, another potential spike in house prices raises concerns.”
What are the potential downsides of 1% mortgages for mortgage borrowers?
Kellie Steed, a mortgage expert at Uswitch, said:
“There are potential pitfalls that the mortgage borrower would need to consider before pursuing a 1% mortgage.
“Firstly, borrowers securing a 1% mortgage could find themselves burdened with higher mortgage payments due to both the larger loan size and higher interest rates.
“Mortgage lenders typically view 99% loan-to-value (LTV) mortgages as particularly high-risk lending, so the rates available are considerably higher than they would be for lower LTV borrowing.
“Furthermore, 1% mortgages present a higher risk of the mortgage borrower falling into negative equity.
“If house prices decline suddenly after taking out the mortgage, the borrower will hold minimal equity due to paying such a low deposit.
“This can result in them owing more than the value of their home – or negative equity.
“This can then be problematic if they want to move or remortgage.
“So whilst 1% mortgages may appear attractive to first-time buyers who are struggling to save a substantial deposit, it’s important that they consider the risks involved.
“It’s more cost-efficient and less risky to save as high of a deposit as you can afford.
“This will reduce your loan-to-value ratio, which should provide access to lower mortgage rates, and less potential for negative equity.”
Kindly shared by RVU Brands
