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99% mortgages: a dynamite or disaster scheme?

Stephen Perkins, Managing Director at Yellow Brick Mortgages 
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Speaking to the Newspage news agency, The Freelance Informer asked lenders, mortgage experts and financial advisers their take on the Conservative Government’s talk of encouraging lenders to offer 99% mortgages. Here’s what we wanted to find out:

  • Do seasoned self-employed and contractor workers have a chance of getting a 99% mortgage? And if so, what would the criteria look like? 
  • Who would offer them? 
  • What protections would be in place for mortgage holders? 
  • Would a Labour government drop these products as soon as they came into power?

Applying for a mortgage, whether your first or fourth can be like taking a road trip with overbearing in-laws. It’s painful but must be done.

The main pain point of the process is affordability, and proving it with ample facts and figures. However, if you are self-employed, you will likely feel like the less popular cousin being left to sit at the kiddy table, being put through more loops than salaried or PAYE applicants. This is often because high street lenders are less experienced with self-employed applicants, which should be a thing of the past given the growing number of freelancers and small business owners in the UK.

According to the latest Labour Force Survey (LFS) data, there were 4.31 million self-employed individuals in the UK. This figure represents around 15.2% of the total workforce.

Michelle Lawson, Director at Lawson Financial says “Lenders always see self-employment and contractors different to those permanently employed due to the risk of variable and inconsistent income. The truth is, very few lenders do these types of mortgages well and truly understand these types of employment which is a shame as it is a big market.”

That begs a few questions. If a 99% mortgage scheme got the green light in the UK lending market in 2024 would mortgage lenders be willing to offer them and would the self-employed be welcome to apply? Is such a scheme just asking for another financial crisis and short-term political gain to grab easy votes?

Austyn Johnson, Founder at Mortgages For Actors 

When asked whether self-employed applicants would have a running chance of being eligible for a 99% mortgage given their sporadic earnings, Austyn Johnson, Founder at Mortgages For Actors had this to say:

“Can they write people out based on their work? They could end up with a discrimination case against them if so! Personally, I feel that self emplyment is actually more stable than PAYE! Althought the money is not totally the same every month, it usually levels out over the years. Plus, if a self employed person was suddenly out of work, they can diversify a lot easier as they dont need to jump through all the interview/experience hoops like a previously Paye person. They could literally go from mortgage advising to grass cutting the next day if needed.”

Not everyone is convinced a 99% mortgage is a good thing

Gary Bush, Financial Adviser at MortgageShop.com says the latest “government meddling” in the UK property and mortgage market isn’t well received by financial advisers, especially those who have “grown their teeth in the industry.”

Bush believes lenders operating already in the higher loan amount arena are already doing a good job and there is more to follow right up to 100% soon it seems.

Bush poses the question, “99% mortgages are great to assist first-time buyers but without the very much needed drastic increase in ‘affordable homes’ how is this going to make affordability not a concern? It’s a little like the Help to Buy scheme and an attempt to paper over the cracks. The devil is in the detail of this latest scheme and we await a chance to properly scrutinise the full details before committing ourselves to a real opinion.”

Lawson sees the 99% mortgage scheme proposal as “yet another desperate attempt at a vote-catcher rather than coming up with something with serious legs but the devil, as always, is in the detail.”

She says affordability and stress testing are more the issue than the deposit for First-Time buyers in most areas due to the house prices.

She explains, “A 1% deposit is dangerous as most would take a long term of say 30, 35 even 40 years so the borrowers actually pay little off in the early years so there is a high risk of either negative equity or being a mortgage prisoner if not modelled correctly. Serious thought should be given to some of the most vulnerable buyers and the focus should be on Housing being a senior department rather than using it as an election bribe.”

99% mortgages for the self-employed: will lenders bite?

Stephen Perkins, Managing Director at Yellow Brick Mortgages told us, “Most banks would look to offer these mortgages, as they would be protected by guarantees from Government. Therefore there is no reason to believe that self-employed borrowers would be any less eligible than their employed counterparts, similar to current 95% mortgages.”

There would be no protections from negative equity to borrowers, and the scheme could inflate house prices escalating the problem they face further.

Stephen Perkins, Managing Director at Yellow Brick Mortgages 

Perkins sees the biggest issue is that the maximum borrowing deemed affordable will not be enough to obtain 99% of most house prices, so the scheme will likely only benefit a minority of borrowers, similar to the current 100% offering for renters that most are not eligible for.

He says, “There would be no protections from negative equity to borrowers, and the scheme could inflate house prices escalating the problem they face further.”

James Bull, Mortgage Broker at JB Mortgages says when the government brings out mortgage guarantee products it is up to each lender to decide if they will offer this or not. But, he says, from experience with the help-to-buy scheme, most of the high street lenders and even “many specialist lenders were happy to get involved.”

He sees lender criteria being very similar to normal mortgages so tells The Freelance Informer, “There is no reason to believe it will be more difficult for self-employed or other niche clients to be accepted.”

He adds, “A scheme like this is likely to be very popular so I would be surprised if a Labour government pulled the plug on a successful scheme.”

Ranald Mitchell, Director at Charwin Private Clients says he believes self-employed applicants will be accepted for 99% mortgages just as they are now and any deviation from that would “frankly be discriminatory.”

He says a 1% deposit does carry an element of risk, with the prospect of negative equity in the earlier years. However, Mitchell says mortgages backed by this scheme will be subject to monthly capital repayments, increasing equity month on month.

“If this scheme is launched and subsequently reversed by a new Government, they’d be playing with fire,” he says. It will be hugely popular from day one, allowing homeownership opportunity to tens of thousands, who otherwise may not be able to follow their dreams of owning their own home.”

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What do lenders catering to the self-employed think?

Ross Lacey, Director & Chartered Financial Planner at Fairview Financial Management which specialises working with both first-time buyers and company directors, says the firm sees no reason why these high LTV mortgages won’t also be available to the self-employed.

“In the same way as is currently the case with 95% LTV mortgages, self-employed borrowers will need to demonstrate at least one year of profitable trading (preferably more) and meet the affordability requirements of lenders for the loan amount they need,” he tells The Freelance Informer.

Lenders are increasingly getting to grips with self-employed applicants, says Lacey.”Lenders have become more pragmatic over recent years when dealing with self-employed / company directors. A good example would include lenders who will look at the net profit a business has made rather than the actual dividends drawn. This means that company owners are not penalised for being tax-efficient and drawing only what they need.”

Could regulation get in the way of a 99% mortgage scheme?

Others in the marketplace are not as convinced banks will jump at putting 99% mortgages on their books. Scott Taylor-Barr, Principal Adviser at Barnsdale Financial Management says regulation could be an initial challenge:

“Given the mechanics and regulations that sit behind high loan-to-value/small deposit mortgages, I cannot see lenders rushing to offer these deals; they will be very capital hungry and so require a considerable margin to be charged to make it worthwhile, unless the government are also planning to amend the lending regulations or underwrite a proportion of the risk (as they did with 5% deposit mortgages sometime ago), to make the plan more palatable to lenders.

He continues, “Even if they do take some action to support lenders in offering 99% mortgages, I would imagine that lenders will look at minimal risk borrowers and low volumes – so I’d expect initial offerings to be strictly first-time buyer only, employed applicants with a good track record in their job and minimal liabilities.”

🤔What’s your take on a 99% mortgage scheme? Share your views in our comments section. Or share this article via social media to continue the conversation.

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