Ashley Pearson, Head of Intermediaries at Loughborough Building Society
Rumours that Chancellor Jeremy Hunt planned to introduce a 99% LTV mortgage designed to help first-time buyers (FTBs) get a foot on the property ladder in the Spring Budget dominated headlines last month.
While the finer details of the supposed government-backed policy were rather scant, the news sparked a significant level of debate and criticism among commentators over its legitimacy but the idea was scrapped as quickly as it had apparently been conceived.
One of the major objections to the proposed scheme was that having a smaller deposit risked leaving buyers in negative equity if house prices were to drop significantly in the future.
Another concern was that, although it would ease the pressure on FTBs when saving for a deposit, it would not make the cost of buying a property any more affordable, especially in the higher interest rate environment.
Given the fact that the concept of a 99% mortgage was not too far removed from a product that already exists in the market – the 100% mortgage – the furore and attention surrounding the proposed scheme came as somewhat of a surprise.
Alongside many other lenders, we have been offering 100% mortgage products for quite some time, therefore, a government-backed 99% mortgage product did not seem such an unusual concept.
While it is certainly true that 100% mortgages have come under a fair amount of criticism over the years, this type of lending solution can offer a perfectly viable alternative for those borrowers who are looking to get onto the property ladder but are struggling to raise a deposit.
There are many different variations of this type of mortgage in the market today and understanding what they are and how they work is important when addressing the needs of a variety of clients.
For example, here at The Loughborough, we have a suite of family assist mortgage solutions including a family deposit product which enables the borrower to take out a 100% LTV mortgage and have another family member (typically parents) guarantee a deposit of up to 20% of the purchase price.
This can be done by placing a collateral charge against the depositor’s own property or as a cash lump sum into a savings account offering a 3% interest rate. In both scenarios, the deposit is released after seven years, or sooner if there is enough equity in the property when it is time to remortgage.
This can prove to be an attractive solution for parents and family members in the current higher interest rate environment where gifting a deposit may no longer be financially viable. Instead, a family assist mortgage not only means they will get their money back; they will also earn interest on their money while still helping their child buy a house.
A similar proposition is available through our Joint Borrower Sole Proprietor (JBSP) Deposit Guarantee product which enables a family member to provide a 20% security against their house or as cash held in a deposit guarantee account, while also boosting the applicant’s borrowing capacity by using family members’ income for affordability purposes.
Again, in most cases, this tends to be the borrower’s parents, but other family members such as grandparents, siblings and aunts and uncles can also be listed on the application, although the property will only be legally owned by the occupier.
As with all forms of borrowing, there will always be an element of risk involved and family members should ensure they seek legal advice to understand what would happen if the borrower failed to keep up with mortgage payments.
Given the level of complexity involved in these applications, it is important to note that each one is individually assessed and underwritten to ensure maximum affordability for the client. This also enables brokers to get answers to any questions they may have regarding the application process.
Not only does this help to provide surety of service and outcome, it also allows brokers to help their clients explore every avenue of getting on the property ladder and achieve their homeownership aspirations in an innovative yet responsible manner.