10% Deposit Mortgages in a Post-Lockdown World
Last Updated: 21-12-2020
Reading Time: 13 minutes
Since exiting lockdown (December 2020), several lenders have now relaunched 10% deposit mortgages. Many, including several contractor-friendly lenders, are hoping to tempt low-deposit buyers before the Stamp Duty holiday ends.
But buyers shouldn't get complacent. The current processing time of mortgages is double the norm.
The upshot? There's only a small window remaining to make the most of SDLT's reduced rate. Today, we consider:
- the recent history of low deposit lending,
- the immediate future of high LTV,
- the relationship between low deposits and lender 'risk' assessment, and
- what you can do to avoid the worst of new, higher interest rates.
Table of Contents
Navigate your way through the article:
- 10% deposit mortgages: now you see them…;
- Which lenders are offering 10% deposit to contractors?
- A Year Of Turbulence;
- Light at the end of the tunnel: most notable mention, Accord Mortgages;
- What's with higher interest rates?
- Update, 21/12/20: Metro relaxes affordability criteria for contractors;
- New risk and its effect on mortgage borrowing;
- "Risk-based pricing" may replace the generic mortgage pricing model;
- Staving off the return of the "Mortgage Prisoner";
- What caused homeowners to become imprisoned by their mortgage?
- What history has taught us about low deposits;
- How are potential/existing homeowners supposed to know what's best?
10% deposit mortgages: now you see them…
History and market demand say that 90% LTV (10% deposit) mortgages couldn't disappear forever. But, since the first lockdown, availability of lower deposit mortgages has been erratic.
All lenders have tried to reintroduce 10% deposits since. But within days—or even hours—of advertising 90% LTV, they've withdrawn them. Why?
Well, lenders have short- and remote-staffing issues to reign in. Then, there's sheer and pent up demand deluging them when they make these mortgages available. Plus, in the background,
"capital markets [are] not comfortable with the risks of high LTV mortgages"
~Louisa Sedgwick, Intermediary Mortgage Lenders Association chair; Vida Homeloans managing director of mortgages
Combine those three factors and you begin to understand the whac-a-mole behaviour of low deposit deals. But, with their reintroduction from several lenders, are we now turning a corner?
Which lenders are offering 10% deposit to contractors?
Of the raft of are lenders offering 90% LTV, many are contractor-friendly. However, with the exception of one star lender*, the mortgages on offer come with caveats.
Here's the what's what of current 10% deposit mortgage deals:
- Halifax and Virgin Money:
- 90% LTV for first time buyers only, and only on 5-year fixed rate;
- Metro Bank1 & Atom Bank:
- 90% LTV for both first time buyers and homemovers, 5-year fixed only;
- 90% LTV for homemovers and first time buyers, but 'capping' contractor affordability;
- Platform (Co-op):
- 90% LTV on 5- and 2-year fixed, for first time buyers and homemovers.
- Accord Mortgages (intermediary/broker only):
- 90% LTV across the board! (see below).
Several of the deals outlined come with cashback incentives. And they need it. These rewards may sweeten the higher interest rates† we're seeing post-lockdown.
A Year Of Turbulence
During this year's turbulence, many lenders have struggled to sustain 90% LTV products. All brokers have faced uphill struggles to maintain the levels of service to which their clients are accustomed.
We've seen completion times double (and more). Risk factors from all directions have forced up interest rates. And many lenders have put up barriers, "don't call us, we'll call you" perhaps the most frustrating.
Let's hope this time around, 10% deposit mortgages are constants on lenders' shelves.
*Light at the end of the tunnel: most notable mention, Accord Mortgages
So, please, take centre stage, Accord Mortgages, Yorkshire Building Society's intermediary service.
Even now, they're offering 10% deposit borrowing across the board.
They welcome first time buyers, homemovers and remortgages.
What's more, their staff have been supportive, flexible and, most importantly, available!
If anything good comes from this annus horribilis, it will be our relationship with this (comparatively) new contractor-friendly mortgage lender.
Our brokers, Andrew, Roger and George in particular, have called upon Accord time and again, with exceptional results. Our heartfelt thanks and season's greetings go to the intermediaries' team in Bradford.
1Relaxed affordability criteria for contractors
A great development has seen Metro Bank relax its contractor affordability criteria.
Now, the lender has removed the restriction of insisting contractors have 12-months' experience working in a fixed-term role.
Instead, contractor applicants can evidence 24 months' continuous employment in the same industry.
This will help contractors who've made the jump from permie to independent professional in the last two years.
Neither does the bank apply the barrier of minimum contract value, nor profession/industry. And they'll allow a generous 6-week gap between contracts during the past year!
†What's with higher interest rates?
For buyers and brokers alike, this is a frustrating time. Even more infuriating is that, when lenders deign to offer lower deposit deals, they have (comparatively) eye-watering interest rates.
The layperson can't grasp why rates are so high. After all, the Bank of England's base rate is low enough to be negligible.
So, are lenders 'cashing in'? Are they betting that demand will keep interest rates and house prices high? Maybe yes…
New risk and its effect on mortgage borrowing
Contractors and the self-employed are no strangers to punitive lending criteria. Since the COVID pandemic began, those criteria have got no easier.
But, today, independent professionals are no longer alone in this plight. Not that makes the scenario any less painful, but it indicates a fresh modus operandi from lenders.
In effect, the often insurmountable barriers independents have historically faced are bleeding into mainstream residential lending. Not, perhaps, the same criteria. But, new affordability risks factors are in play, of which everyone buying a home should be aware.
"Risk-based pricing" may replace the generic mortgage pricing model
Now more than ever, your ability to get a mortgage is as unique as your DNA. One prediction for the 'new normal' is that lenders will offer future rates based on a borrower's unique circumstances.
Again, for independent professionals, this change in tack is nothing new. But let's do the exercise, anyway.
Imagine two contractors on the same day rate, with similar contracting history. One works in retail, the other in an arm of the medical service.
Next, consider the threat of mass unemployment: it's very real! Retail looks set to suffer more than it has already in the new year.
In contrast, the NHS and private practices can't recruit fast enough.
Which of those industries do you think banks will favour: risky retail or mass-hiring medicine?
In theory, we could submit both contractors' applications to the same lender and get two very different offers. Contractors are used to this. But now, the same disparity could also apply to PAYE-employed applicants!
Staving off the return of the "Mortgage Prisoner"
So, what can we do to make lenders look at us in a positive light?
Let's look back to the last time the markets were in such turmoil: the 2007/8 Financial Crises.
One vivid characteristic that ensued the 2007/8 debacle was the 'Mortgage Prisoner'.
This was where the homeowner saw the devaluation of their home to the point of negative equity.
In effect, their mortgage commitment trapped them in their homes. Even worse, they often couldn't remortgage beyond the introductory rate.
What caused homeowners to become imprisoned by their mortgage?
Historically, homeowners had to await 'release' (positive equity) as they'd only put down the minimum deposit.
Back then, 5% was the norm. But there were even many 100% LTV mortgages on offer.
With such low deposit mortgages, negative equity was only a financial hiccup away. The minute your home devalued (often due to factors outside your control), you'd find your mortgage balance was more than your home was worth.
It's the threat of a COVID-19 backlash devaluing homes and increasing the risk of unemployment that's concerning lenders today.
What history has taught us about low deposits
To curb the chances of mass negative equity repeating, the FSA (now FCA) introduced Responsible Lending. Post 2007/8, zero-deposit and self-cert mortgages disappeared almost overnight.
Those measures, in theory, reduced the threat of homeowners being chained to their home/mortgage. And, so far, house prices have (somewhat surprisingly) stood up well.
But, can the housing market continue to stand its ground?
With the threat of mass job losses, Stamp Duty returning to pre-holiday levels and Brexit, experts' predictions change daily. Often, one expert contradicts the next, and then even themselves as new forecasts come in from around the globe.
Amid this confusion, one factor remains true: be aware of your genuine affordability!
How are potential/existing homeowners supposed to know what's best?
Your best friend in the current climate is a large deposit. The lower your mortgage's Loan-to-Value, the lower your likelihood to fall into negative equity.
Lenders may also align larger deposits with overall affordability. If so, this will avail borrowers of yet lower interest rates.
And, as mentioned, consider the industry in which you're working. The ongoing threat of lockdowns and furloughs may yet become a permanent lending criterion.
If you're struggling to save a deposit because of your current repayments, consider remortgaging. If you've owned your home for some time, you should have built up equity.
You can use this equity to get a better rate, especially if you've slipped onto your lender's SVR. But this isn't something we'd advise homeowners to undertake 'blind'. Be aware of early redemption fees on your current mortgage agreement.
And please don't think that you're beholden to your existing lender. They may have been the best option when you took out your mortgage. But the landscape has morphed in 2020.
Yes! It's great to see this influx of 10% deposit mortgages post-lockdown. But if it's at all within your power, strive to save a bigger deposit. Reducing your risk could make your dream of remortgaging/homeownership a reality for 2021, and beyond.
Talk to a financial expert, as all our advisors are, to clarify your options.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.
Posted by John Yerou
on December 8th, 2020 15:04pm in