Yorkshire Building Society launches 99% loan-to-value mortgage – is a low deposit loan a good idea?

First-time buyers are being given a new leg-up the property ladder with a mortgage that could potentially let borrowers access up to 99% loan-to-value (LTV).

Mortgage rates hit decade highs last year as interest rates rose and while home loan pricing has dropped recently, the high cost of homeownership remains a barrier for many buyers.

There had been rumours that the government was working on a state-backed 1% mortgage deposit scheme but that failed to materialise in the Spring Budget.

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However, Yorkshire Building Society has stepped in with its own product exclusively for first-time buyers.

It has launched a £5k deposit mortgage product that can be used on homes worth up to £500,000, effectively providing a 99% LTV loan.

“The bunny is out the hat just in time for Easter with this innovative product aimed at those who need it the most,” says Craig Fish, director at Lodestone Mortgages & Protection.

“First-time buyers are those who stimulate movement further up the property ladder, so this product should solve the chicken and egg situation that the UK property market currently faces. 

"It's helping those who need it the most to get on the property ladder, and subsequently allowing those already on the ladder to move further up it.”

But there are risks to be aware of.

How the £5k deposit mortgage works

Pulling together a deposit to buy a property can often be the biggest barrier for first-time buyers.

The typical price for a first-time buyer home is £235,020, according to the Land Registry.

A buyer would need a deposit of around £23,500 to get a mortgage for a typical home but this figure varies regionally and may be higher in the south of England and London where property prices tend to be more expensive.

Many first-time buyers will also be struggling with high rents, making it hard to save for a large deposit.

Yorkshire Building Society’s mortgage aims to help.

It is offering a five-year fixed rate at 5.99% and, as the name suggests, buyers just need a £5,000 deposit.

So, on a £235,020 property, a first-time buyer would be getting a 97% LTV mortgage.

Applicants will still need to pass affordability tests to prove they have enough income to afford the loan.

The repayments on a 97% LTV mortgage using this product for a £235,020 property would be £1,481 per month on a 25-year term.

There are some restrictions though that could limit demand.

The maximum property value is £500,000 and it can’t be used for flats or new-build houses, which are typically popular among first-time buyers.

The deal is also not available in Northern Ireland.

If you’re applying for a joint mortgage, one applicant must qualify as a first-time buyer. Neither applicant can currently own a property and you must both be aged 70 or under at the end of your planned mortgage term.

Is a low deposit mortgage a good idea?

This isn’t the first attempt to help struggling first-time buyers.

Many had support from the Help to Buy Scheme , which provided government-backed mortgages worth up to 95% LTV on new-builds before it ended last year.

Skipton Building Society recently tried to address this last year with the launch of the 100% LTV Track Record mortgage aimed at tenants with at least a 12-month history of paying rent on time.

The Yorkshire Building Society product provides a viable option if you have a small deposit but it is important to consider the costs.

If you maxed out the loan for a £500,000 property, the monthly mortgage repayments on a 25-year term would be £3,186 a month.

It may be possible to access cheaper mortgage rates if you save for a larger deposit and go for a 95% or 90% LTV loan instead.

For example, HSBC currently has a five-year fixed rate for 90% LTV at 4.62%. The monthly repayments on a £500,000 property over a 25-year term would be £373 cheaper at £2,813.

There is also a higher risk of falling into negative equity if you borrow a large amount with a small deposit to purchase a home.

Some analysts expect house prices to fall by as much as 4% this year, which may not give you much of a margin if you have a 1% deposit loan.

Akhil Mair, director of Our Mortgage Broker, told the Newspage agency: “With house prices being as unpredictable as ever, there's a legitimate worry about the potential for negative equity down the line. 

“It's a delicate balance between innovation and risk, and one that warrants careful consideration. 

“Nonetheless, any initiative aimed at helping first-time buyers achieve their homeownership dreams is a step in the right direction. Let's hope for the best and keep a watchful eye on how this unfolds.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, says the threat of negative equity is greater the higher the level of borrowing.

"With only five-year products available, hopefully over that period of time the value of the property will increase," he says.

"There is no interest-only option so borrowers will be paying back a small amount of the capital as well as interest each month, improving their equity stake.

“Critics may question what will happen if the buyer loses their job and can’t afford their mortgage payments but the same rings true for renters. Not everyone can move back in with mum and dad."