The year was 2006 and Carly had fallen in love. Like many in their late teens, she was sure this relationship would last forever. So when her boyfriend’s mum, an estate agent, encouraged them to buy a house together, saying that there were special mortgages available to help people like them (i.e. without savings), Carly went along with it.
“I didn’t come from a family who spoke openly about money, and hadn’t been taught anything at school about financial wellbeing, so I had no reason to think anything would go wrong,” she says over the phone from Norfolk.
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At the time, a popular product being sold by banks was the 95 percent mortgage, which required only a 5 percent deposit. But Northern Rock, the bank where Carly and her boyfriend became customers, went one step further. “They called them a 110 percent mortgage,” she explains. “Essentially they lent you the mortgage as well as the money for the deposit in a separate loan – it was so easy!”
It’s been a long time since 95 percent mortgages were available to buyers, but they have recently hit headlines again as the government seeks to appeal to Generation Rent by making it easier to buy a house. In mid-April, they worked alongside banks to launch a scheme to reduce the value of the deposit required to secure a mortgage from ten to five percent. For some, this news will be life-altering, allowing them to get a foot on the property ladder and a semblance of control over their living situation after years of residing in crappy rentals for astronomic prices and at the behest of estate agents and landlords.
But is this policy really the flawless solution for young people eager to buy that the government has sold it as? Is it a good option for everyone? And what should you know while considering if this is the right choice for you?
“This is not going to be – for most people – the silver bullet that means you can suddenly buy your first home or flat. It might well be the silver bullet for some, but not everyone,” says Guy Anker, deputy editor of Martin Lewis’s popular site, Money Saving Expert (MSE).
He explains that “across the board, there are a load of considerations”, noting firstly that the average interest rate on your loan is likely to be higher if your deposit value as a borrower is lower, meaning you’ll only end up paying more over the duration of your mortgage.
For example, when the MSE team compared the cheapest five percent deposit fixed interest rate mortgages against ten percent mortgages on a property valued at £200,000, they found that the former worked out as £2,500 more expensive over a two-year period. “Every additional five percent of deposit you can put down, the mortgage you are able to get tends to get cheaper,” says Anker. Roughly translated, this means that if saving another five percent is feasible for you, you’ll be paying the bank significantly less in the long term.
In addition, once a fixed-term mortgage ends, you’re then subject to the vagary of changing interest rates. Luckily at the moment, these are historically low, but that also means the only way is up, which might result in higher monthly payments after your current term ends. Anker recommends using a mortgage calculator like the one on MSE’s site to calculate rough costs.
Anker also notes that it’s important to remember that this headline doesn’t mean lenders are suddenly more confident about the ability of borrowers to repay their loans, which is essentially the deciding factor in who gets a mortgage. “Behind the scenes, the government is telling banks they will cover the loss,” he explains, “meaning their risk is lower.”
This is important because it demonstrates a gap between the behaviour of banks, which tend to be over-cautious these days, and the government’s strategy, which it’s fairly safe to assume isn’t prioritising you and your financial security, especially at a time when the economy is in such a fragile state.
The catalyst for what happened next in Carly’s story was such a seismic moment in the world’s economic history that it will be studied in classrooms long into the future: the global financial crisis of 2007-08. The repercussions of this are still felt across the world, with a financial impact on individuals not unlike what we’ve seen over the past year during the pandemic. For Carly and her boyfriend, it transformed the little house they’d bought to start a life together into a weight around their necks that eventually pulled them apart. Carly, now a 34-year-old mum, has only recently finished paying off all the debt she accrued in those years.
“The housing market crash meant ours went into massive negative equity [when the amount borrowed is higher than the house’s value], and of course we had none of our own money in it – it was all loan,” she explains. At the time, Carly was earning £15,000 a year in sales, and shared a five-year fixed-term mortgage at 7.59 percent interest. “I didn’t think twice about it at the time, but 7.59 percent – that number is etched so deeply in my brain now,” she says regretfully. “Even five years later, when our mortgage came up for renegotiation, our house was valued way below what we’d paid for it and we owned none of it.”
Ultimately, Carly says, it’s important to remember that housing prices are subject to drastic and sometimes uncontrollable market forces, so you shouldn’t trust that they will continue to rise.
Clare Seal, author of Real Life Money and owner of the @myfrugalyear Instagram account, which chronicled her journey from £25,000 debt to zero in two years, advises people to stress-test their finances and be realistic about future plans before committing to a mortgage. “Could you afford to pay your mortgage if you lost your job for a bit or decided to go and do a period of study?” she asks. “Could you weather a period of negative equity? Or, if you move in with a romantic partner, what would happen if you broke up?”
Claire Ward, a senior family law expert at Langleys Solicitors, notes that the new scheme adds an urgency for couples to purchase a home together with no thought for their current relationship and financial status. “Couples must consider a sensible approach to shared ownership and have written agreements in place to avoid lengthy and costly property disputes in the future.”
First-time buyers, she says, should “look into reaching a legally recognised agreement and importantly seek separate legal advice over how best to protect their own assets. Choosing to enter a legally binding agreement means that each person’s stake in the shares of the property is fairly recognised and that they have agreed in a way that gives each person a way out while being sure of their own protection.”
Carly agrees that though it might not be a sexy conversation, thinking about how easily you could leave the mortgage and talking about that seriously with your partner is important, too. Normally if a relationship breaks down between two co-owners of a house, the two options are: sell the home and split the equity (how much of the value of the property you actually own, which usually means the deposit plus what you’ve paid off from your mortgage, as well as any increase in value to the property since you bought it) or if one partner wants to stay, they buy the other out.
But Carly, as the leaving party, had to buy her own way out by splitting the money lost on the house’s value with her ex. She did this by taking out yet another loan. “The debt just continued to pile up,” she tells me. “It also got in the way when I met my now husband because I wasn’t free to make the decisions I wanted to because of the burden of all of this.”
Anker also urges people to think about the hidden costs of owning a property, whether that’s service charges or ground rent for those living in flats, or the cost of suddenly having to replace a boiler overnight. Simply put, unless you want to keep accruing more debt, it’s a sensible idea to have a rainy-day fund to help you cover the general costs of maintaining a property. “Don’t overstretch yourself for the sake of a little bit longer renting,” he says, also keen to remind people that your borrowing ability will also be affected if you are self-employed or on furlough.
Ultimately, a good rule of thumb in life is that if something seems too good to be true, then it probably is. This is especially the case when money is involved and exponentially so if it relates to government policy. Making housing more affordable would be a much better, and more responsible and sustainable solution for younger people.
In the total absence of that, don’t be put off by this scheme if you’re confident you can do it. As Anker says, “If you can afford it, you’re eligible and it’s the right thing for you, then it is a positive thing to own a property”.
