Is it a smart move or reckless gamble to buy a home with a 98% mortgage?
Buying a family home always seemed out of reach for Abigail Cotterell and her husband Alex. Years of paying sky-high nursery fees for their children Celia, now six, and Percy, four, left them struggling to save for a deposit.
The average amount put down by first-time buyers in England is a whopping £63,855, according to the latest mortgage data from trade body UK Finance.
But Abigail, 34, and Alex, 36, managed to secure their dream home in February for £485,000 with just a £10,000 deposit.
Their new home is a three-bedroom detached house with seven acres of land in Midsomer Norton, a small leafy town in Somerset.
That's because the couple were the first to take out a new mortgage from Santander that allows first-time buyers to borrow up to 98 per cent of their house price.
Called My First Mortgage, the loan is a five-year fixed rate deal for first-time buyers with a deposit of at least £10,000 and a house price up to £500,000.
Delighted: Abigail and Alex Cotterell with children Celia and Percy and their home (inset) with seven acres of land in Somerset
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It launched with a 5.19 per cent rate in February but that has now been hiked to 5.85 per cent.
David Morris, head of homes at Santander, says: 'We know that first-time buyers face
systemic and structural challenges. This product brings forward home ownership by around five to six years.'
The average age of first-time buyers has climbed to 34 due to soaring house prices and rising rental payments that make it hard to build up a deposit.
Mortgages targeting these buyers who would otherwise struggle to buy a home are a burgeoning part of the market.
These include loans that require no deposit at all – from Skipton Building Society, Hanley Economic Building Society and specialist lenders April Mortgages and Gable Mortgages.
Yorkshire Building Society offers a one per cent deposit deal for buyers with £5,000.
Nationwide's Helping Hand mortgage allows buyers to borrow up to six times their salary, instead of the typical 4.49 times.
David Hollingworth, of broker London and Country, says: 'Products like this accelerate getting on the ladder.
'There has been a lot of focus on first-time buyers from lenders – both on affordability (the amount that people can borrow), but also for those that are struggling to get a deposit together.'
Abigail and Alex, who have been together for 16 years, saved for three years towards the £9,250 they would need to pay.
'It started at £100 a month. Then in the second year we put aside a little more and then more again in the third year,' says Abigail, who works as a finance officer for a charity. She adds: 'Our monthly mortgage payments will be around £2,300 a month. But by the time we move in we won't have nursery fees to pay, which are a killer.'
She says that the new mortgage payments are roughly equal to how much they currently spend in rent, plus the £1,400 or so a month they will no longer be paying in nursery fees.
'This house is in great condition and has a really good garden with a treehouse,' she says. 'We are all just so thrilled and excited.'
However, although high loan-to-value mortgages can help buyers get on the property ladder sooner, experts warn they come with significant risks.
Buyers with small deposits are more vulnerable to falling into negative equity, which is when the value of a home falls and is lower than the size of the outstanding mortgage.
Tellingly, Santander will not offer its 95 per cent mortgage for the purchase of a new-build home or flat, as values of these are stagnating, so they are among properties at most risk of negative equity. Negative equity is a problem if you sell your property at a price that is not enough to cover your outstanding balance.
It also makes it harder to remortgage as lenders may not be willing to offer you a deal.
You may end up stuck with your current lender and have little choice over the loans that are offered, which can result in higher monthly payments.
Hollingworth says: 'Consider what the affordability looks like and make sure that you are not overstretching.'
Rates on high loan-to-value mortgages also tend to be higher than average. If interest rates rise in future, already-high monthly payments could become even more of a stretch.
If you struggle to pay your mortgage, your lender may be able to help by extending your mortgage term to bring down payments or switch your loan to interest-only.
But buyers with a small deposit will likely already have a long mortgage term, making it harder to extend, and an interest-only mortgage is only a temporary solution for around six months.
In the worst-case scenario, your home may be repossessed if you can't keep up payments.
Plus, interest rates on this type of deal are higher than you might otherwise pay, according to Hollingworth.
If you can get a five or even 10 per cent deposit together, it opens up more options and you'll pay less in interest over the long term.
Take someone buying a £500,000 house with the two per cent deposit deal at 5.85 per cent interest. Over a 25-year term, the buyer pays a total of £933,739 – £443,739 of which is interest.
With a 10 per cent mortgage, they could get a rate of 4.49 per cen. Total payments would be £184,393 less over the 25 years.
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