The government has reportedly stepped up its plans to introduce a 1% deposit, or 99% loan-to-value (LTV) mortgages with a view to helping more first-time buyers purchase onto their homes.
The aim of this initiative, which could be announced in the spring Budget on 6 March, is to ease the financial barrier to homeownership, with the UK government guaranteeing the mortgages. But what impact will this have on the housing market?
This would be similar to the existing Mortgage Guarantee Scheme, which aims to help those buying homes with 5% deposits.
If it is confirmed, the policy would no doubt be welcomed by some first-time buyers.
However, critics say that it could also push up house prices, and that struggling first-time buyers may not be able to afford the monthly repayments required on such a large mortgage, especially as rates remain relatively high.
Brokers offer their views:
Simon Gammon, managing partner at Knight Frank Finance: “The popularity of the scheme will depend on how the lenders opt to price these mortgages. If they are competitive, take up will be substantial, but getting rates competitive will require the government to underwrite quite a sizable proportion of the loans.
“Fuelling demand to this degree without a massive surge in housing supply will undoubtedly fuel house price inflation. There is also the very real prospect that any falls in house prices will leave many buyers in negative equity, with the taxpayer on the hook in the unfortunate circumstance that borrowers aren’t able to meet their payments.
“It’s quite a high-risk strategy, and it illustrates just how few options the government has if it wants to help first time buyers in meaningful numbers in the short term.”
David Hollingworth, associate director at L&C Mortgages: “This would likely open up an alternative option for first time buyers struggling to build a deposit.
“Requiring a smaller deposit could help accelerate the ability to buy, for those that can fund the remainder from mortgage borrowing.”
Daniel Austin, CEO and co-founder at ASK Partners: “This is positive news for the housing market as it will serve to reinvigorate the first time buyer market, consequently driving more turn over of properties higher up the chain. With rental prices so high, it can be hard to save for a meaningful deposit but those managing the rents would find it easier to make monthly mortgage payments.
“This will be very welcome news for a generation of renters with no access to bank of mum and dad, who might now have a chance of home ownership, and for developers who we saw benefit from the previous Help to Buy scheme. For the property sector overall, the fact that both parties are prioritising high profile housing policies in the run up to the election is encouraging, as is any financial stimulus to the sector as long as it doesn’t create too much froth in the market.”
Arjan Verbeek, CEO of Perenna: “While industry commentators have been very quick to dismiss this scheme, if done correctly, this has the potential to unlock the housing market. It is essential that the risks, like negative equity, associated with higher LTV mortgages, are mitigated, which can be achieved by combining the scheme with long-term fixed rate mortgages (LTFRM). The key is to remove market risk from borrowers, which traditional mortgage products can’t deliver.
“With an LTFRM, borrowers can also afford a larger loan and in some instances, up to six times their annual income. This is because the traditional mortgage products, and their ‘affordability’, are inherently linked and restricted to the lender’s much higher standard variable rate (SVR).
“However, there’s a clear need for regulation to be aligned and updated to reflect the current market. The Bank of England rightly introduced a loan-to-income cap to protect against reckless lending and excess leverage, but LTFRMs should be exempt because payments are fixed for term duration. The benefits to homeownership offset the risk of leverage on a long-term fixed rate too and the removal of the limit will incentivise larger lenders to offer more LTFRMs – ultimately benefiting the consumer with greater product choice, innovation, and giving a chance to step onto the housing ladder.”
Kirsty Wells, director at Blueprint Mortgages & Protection: “It is amazing to have something to help first-time buyers get on the property ladder, especially those that have fallen into the rental trap and are unable to save a deposit. However, it makes me nervous that the property market only has to drop very slightly before the borrower is then in negative equity and a mortgage prisoner.
“Back in 2004 I bought my first property by using the 100% mortgage and it was great whilst prices were shooting up but then in 2008 when they dropped like a stone it was scary to then be in negative equity. I definitely would not be encouraging clients to be putting themselves in a position to have to go through that.”
Rohit Kohli, director at The Mortgage Stop: “It’s great to see new ideas popping up to help first-timers get onto the property ladder, with the latest being 1% deposit mortgages. But let’s be honest, it feels a bit like slapping a plaster on a gaping wound.
“The real problem is a serious lack of affordable homes, and it’s something that’s been dodged for too long by a parade of housing ministers who seem to be in a competition for who can do the least. The idea of only needing to scrape together 1% upfront is tempting, sure. But when you think about the sky-high interest rates that’ll come with it, you’ve got to ask who can actually afford this.
“It almost feels like the plan is to have people paying off their mortgage until they’re 100. We need more than just clever tricks to get by. It’s high time for some real action on making housing affordable and significantly boosting the number of homes we build, instead of these quick fixes that don’t tackle the big picture.”
David Sharpstone, director at CIS Mortgage Advice: “The proposal for 1% deposit mortgages, aimed at assisting ‘generation rent’ in owning homes, presents an innovative yet complex solution to the affordability crisis in the housing market.
“While this approach significantly lowers the barrier to entry for first-time buyers, concerns about its long-term sustainability and impact on the market are valid. It’s crucial to consider its potential to once again significantly inflate property prices and increase financial risk for both lenders and borrowers.
“There needs to be a broader strategy to boost supply and ensure housing market stability. Careful, balanced implementation is essential for this scheme to effectively aid young homebuyers without unintended negative consequences. As a mortgage broker, it’s easy to be hopeful about short-term wins, but I also worry about the dangers of negative equity. Such a small deposit will leave borrowers very exposed.”
Peter Stamford, mortgage expert at The Mortgage Uni: “1% deposit mortgages are reported to be the Conservative Government’s latest plan to entice ‘Generation Rent’ voters, ahead of a General Election. This radical approach to dismantling the towering barriers to homeownership will sound fantastic to those struggling to find a larger deposit. However, it will likely come with a sting in the tail, namely higher interest rates. There is also a risk it could once again cause the property market to overheat, driving prices up further. It’s a high-stakes gamble and could potentially fuel yet another house price bubble.”
Richard Jennings, founder & managing director at Richard Jennings Mortgage Services: “This is a great headline for a government with an eye on the next election hoping to secure a younger generation’s votes. Whilst on paper this sounds like a positive move, it will undoubtedly lead to a very high risk of causing another housing bubble. We still see so many people impacted and stuck on the old Northern Rock mortgages. This scheme would undoubtedly offer protection to lenders but what plans does it have in place to protect the borrower? A longer term, sustainable and affordable model needs to be found to ensure future generations can continue to get on the housing ladder.”
Riz Malik, founder & director at R3 Mortgages: “The biggest barrier to young people getting on the property ladder is the lack of affordable housing as successive housing ministers haven’t been in post long enough for their new business cards to arrive.
“A 1% deposit scheme may work in certain geographical areas but in London and the South, it would be a non-starter, and that’s before we have got to mortgage affordability and the risk of negative equity. However, for a Government that looks set to be massacred at the General Election, desperate times call for desperate measures.”
Andrew Montlake, managing director at Coreco: “This latest brainwave comes with more questions than answers. In theory, 99% mortgages could well help some people struggling to save a deposit get onto the housing ladder, but there are more questions around affordability calculations, interest rate costs and capital adequacy rules for lenders. Will this be subsidised by the taxpayer like the Help to Buy scheme to help entice lenders to offer them?
“There is also the concern that schemes such as these act to increase house price inflation as the stock of property generally is not increased or puts more borrowers at risk of being trapped in negative equity should prices fall in the future. The housing market needs urgent attention, but it needs long-term, cross-party solutions, a Housing Minister in situ for the duration and more than empty platitudes or half-baked schemes to secure a re-election.”
Lee Gathercole, co-founder at Rebus Financial Services: “There is most definitely a need in the market for smaller deposit mortgages, especially for those who can’t raise the deposit and are stuck in a rental trap. But for the right type of first-time buyer, I suspect this will require a clean credit profile and tighter income multiple rules.
“I do however have a number of concerns as this is a “high” risk mortgage: what interest rates will lenders be offering on this type of deal, and while it helps with deposits, how this will help with first-time buyers being able to afford the payments?
“A 99% mortgage will be a bigger mortgage loan and probably higher interest rates. As a result, it will be an even bigger ask for those who are located in areas of the country where prices are high, such as London and the south east.”
Ross Lacey, director & chartered financial planner at Fairview Financial Management: “This could certainly help those who want to buy a property, who have the income to support the mortgage payments but are not yet in a position to raise a 5% or 10% deposit. Those who are renting, are sometimes paying a lot more than what they would on a mortgage, and because of this, they aren’t in a position to make any serious headway with saving for the deposit currently needed. Coupled with longer mortgage terms (40 years, or perhaps the introduction of even longer terms for younger applicants?) this could really make a difference to some.”
Charles Breen, founder at Montgomery Financial: “Rishi Sunak is clearly desperate for votes from youngsters struggling to get on the property ladder, as this kind of scheme could be a real vote winner. But short-term gain could result in long-term pain if borrowers slip into negative equity and at this loan-to-value, there is definitely a chance of that. My worry is that this will artificially drive up property prices again, meaning people are buying high and exposed to negative equity, defaults and repossessions.
“We experimented with 100% mortgages back in the early noughties and we all know how that worked out. This is pure desperation to stay in power. This government is so desperate that they will latch onto any idea that wins votes despite the potential for massive negative ramifications.”
