‘I took out a 95% mortgage

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Good afternoon, and welcome to this week’s Home Front. I think we need to talk about low-deposit mortgages. That’s home loans with a 95 or 90 per cent loan but just a 5 or 10 per cent down payment.

According to new figures from financial information service Moneyfacts, the number of low-deposit mortgage deals available for homebuyers is now at its highest level since the 2008 financial crisis.

For buyers able to offer a deposit of 5 per cent of the home loan, there are 442 mortgages to choose from, according to Moneyfacts. Two years ago, the choice was fewer than half of that, at 204.

Borrowers able to pay a 10 per cent deposit now have 845 products to pick from, up from 684 in April 2023.

This is a particular boon (in theory, but more on this later) for first-time buyers without wealthy parents who often struggle to save big deposits.

However, depending on who you talk to, this is either very good or very bad. In my view, it’s a little bit of both. And I say this as someone who took out a 95 per cent mortgage with the help of a Government-backed Help to Buy equity loan in 2017.

Allow me to explain.

As you’ll know if you’ve watched any Hollywood movie about a disaster, whether that’s James Cameron’s 1998 epic Titanic or the lesser-celebrated 1997 classic Dante’s Peak, before most natural catastrophes, there is usually a red light flashing somewhere on a dashboard, whether that’s an iceberg warning or a rogue volacanoligst pleading with authorities to listen to him and take the risk of eruption seriously.

Economic catastrophes are usually no different. Before the 2008 global financial crisis, several warnings were there in plain sight. In the US, consumer credit defaults were rising, suggesting that people had borrowed more than they could repay and a housing bubble had emerged, while lenders gave mortgage credit out like candy without rigorous checks to make sure homeowners would be able to repay their loans.

This created what was called the subprime mortgage crisis, which triggered a financial meltdown across the world.

It’s now thought that 90, 95, 100 per cent mortgages – and even, in the case of lender Northern Rock, 125 per cent – were a major reason why.

Allowing people to take out enormous loans with little capital to put down as a deposit is a double-edged sword.

As I know myself, being able to get a 95 per cent mortgage with only a 5 per cent deposit makes it easier to buy your first home. There’s no way I could have done it in 2017, aged 30, without access to a 95 per cent mortgage product or, for that matter, the backing of a government-equity loan.

A (very necessary) tightening of lending criteria took place after 2008, to prevent a subprime market occurring again. Given that one of the ripple effects of this has been that it is now harder for people with small deposits – such as first-time buyers – to purchase a home, low-deposit loans widen access to mortgage lending and, therefore, homeownership.

That said, they are risky by their nature. Again, I know this very well. Here’s why.

Firstly, a smaller deposit means you have little equity in your home. This means that you are vulnerable to negative equity if house prices go down (as they did briefly for me a few years ago). Negative equity means you owe more on your home than you borrowed, and it is not a financial position anyone wants to be in long-term.

Secondly, a large loan also means you’re more vulnerable to interest rate hikes because, simply, you have a lot of debt. Again, I know this very well. Since 2021, my monthly payments have jumped from £950 a month to almost £1,300 because of the inflation/interest rate crisis that emerged after the pandemic.

This has coincided with repayments on my Help to Buy loan kicking in to the tune of £350 per month. In total, my outgoings have gone up by around £700 a month, but because I, like so many first-time buyers, bought at the top of the market in the late 2010s, my home hasn’t dramatically increased in value.

Thirdly, generally speaking, the way to make a big 90 or 95 per cent mortgage loan “affordable” is to extend the term. This is why first-time buyers today are more likely to be taking out 30 or 35-year loans where previous generations took out 20 or 25-year loans. It’s also why younger generations of homeowners today are likely to be repaying mortgages in retirement. This isn’t necessarily bad – owning a home is still more secure than renting – but, equally, it will reshape people’s finances in old age.

The devil, as ever, is in the details. As Moneyfacts notes, there may be a lot of low-deposit mortgages available now. But that doesn’t mean huge numbers of people are being approved for them.

House prices remain high in relation to incomes across the country and, while mortgages rates have stabilised at around 4 per cent, they are far higher than they were during much of the 2010s.

The availability of low-deposit mortgages, as reported by Moneyfacts, suggests that lenders want to lend to people without huge deposits.

Indeed, Labour would like to encourage this and are asking the Bank of England to relax the rules, put in place after 2008, which limit how many of these riskier loans can be given out.

However, if the number of people with large mortgages rose dramatically, it might become a blinking warning light. Amber at first, and possibly red if the economic uncertainty caused by Donald Trump’s global trade war or Vladimir Putin’s war in Ukraine continues to put pressure on consumers by increasing prices.

There’s no easy fix. If we want to build homes and boost Britain’s economy, we need people to buy them. Low-deposit mortgages are one of the few ways to make that happen unless the Government steps in with something like Help to Buy 2.0. The former puts the risk on individual homeowners like me; the latter means the state carries some of the risk.

We must learn from the mistakes of the past. As 2008 showed, overleveraging ourselves now could cause real financial pain – for individuals and the country as a whole – in the not-so-distant future.

Key housing

The Government’s decision to step in and take control of British Steel’s plant in Scunthorpe, to stop its Chinese owner Jingye from shutting it down, is major news.

The future of the site remains uncertain; British Steel could still be sold to a private company, and there’s nothing to stop another Chinese firm, or indeed, a private equity firm like those who failed to improve the plant’s fortunes from buying it.

It is likely that Sir Keir Starmer and his ministers were pushed to intervene by two things. First, if Jingye had closed down the blast furnace in Scunthorpe, it would have been nearly impossible to get it going again. At a time when a US President is hiking tariffs on imports and sparking a global trade war, this could have meant Britain would have struggled to access affordable steel.

Second, given that Starmer’s Government has pledged to build 1.5 million new homes and lots of new infrastructure, diminishing access to domestically produced steel could have become an expensive headache.

Labour’s ambitious housebuilding plan will be one reason why ministers could take a punt on fully nationalising British steel, because it creates demand.

Labour could (and should) learn from Germany. In the 1960s, the country’s public bank (KfW) provided a massive loan to the German steel sector on the condition that it made the production process more sustainable. Germany now has a green and competitive steel manufacturing sector that is insulated from global economic shocks. UCL economist Mariana Mazzucato has written on this here.

Do you live near a steel plant in Britain? Are you a housebuilder with thoughts about all of this? I’d love to hear from you.

Ask me anything

This week’s question comes from a reader who is happily about to move in with her boyfriend. She wants to know how to navigate the conversation of paying him rent which will go towards his mortgage because he owns his home.

Money is, obviously, never an easy subject to tackle. In 15 years of working as a journalist, I can’t count the number of times I’ve been sent a press release about studies which “show that Brits would rather talk about poo than money”.

But, as with so many things in life, the things you don’t want to do are often the ones that are most important to tackle head on.

I would suggest being open and honest about how much you can afford to pay. Sit down, talk about your respective earnings and work out an affordable monthly payment.

However, because your boyfriend owns his home, you will effectively be contributing to his future financial stability by paying towards his mortgage.

I know it will be the last thing on your mind, but you don’t want to end up insecure and worse off while he’s effectively had help with his mortgage for months or years if you break up.

I’d suggest drawing up a cohabitation agreement which, helpfully, I wrote all about in my column the other week. You can read it here.

Send in your questions to: @Victoria_Spratt, on X, formerly Twitter, @vicky.spratt on Instagram or via email [email protected]

Vicky’s pick

Speaking of Mariana Mazzucato, I just finished her 2021 book Mission Economy. It is a fascinating take on the pitfalls of allowing private finance to take over public services. Now, more than ever in the wake of what has happened at British Steel, it’s worth a read.