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Government's 1% deposit mortgages "a high-stakes gamble and could potentially fuel house price bubble"

ended 21. January 2024

It has been reported that the UK government is exploring the introduction of 1% deposit (or 99% loan-to-value) mortgages as part of its new housing strategy, with a view to helping young people and first-time buyers purchase their homes. The aim of this initiative, which could be announced in the spring Budget, is to remove the financial barrier to home ownership of high deposits, with the UK government guaranteeing the mortgages. Newspage asked brokers for their thoughts, below.

 

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20 responses from the Newspage community

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Peter Stamford
Mortgage Expert at Stamford Home Finance
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'a 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.
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Richard Jennings CeMAP
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.
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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.
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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.
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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 the short-term wins, but I also worry about the dangers of negative equity. Such a small deposit will leave borrowers very exposed.
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Stephen Perkins
Managing Director at Yellow Brick Mortgages
To introduce 1% deposit mortgages, the government will either have to fund or severely guarantee lenders for the additional risk, especially in the current economic climate. Whilst this could help remove one of the largest barriers to homeownership and the need for family support, borrowers will still need to be able to afford and obtain a 99% mortgage, which based on the huge disparity between house prices and incomes, means such a scheme would in fact only benefit a small minority. It sounds great in theory, but could fall apart in practice.
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Justin Moy
Managing Director at EHF Mortgages
This feels like a big sticky plaster for a wound that doesn’t really exist. The take up of 100% mortgages has been minimal, so I’m not sure why 99% mortgages will be all okay. We have seen that schemes such as Help to Buy that may have helped many onto the property ladder but a large percentage of those borrowers are now stuck and cannot move. The painful legacy of 125% mortgages still resonates with the previous generation, too. Whilst it is a tough market at the moment, the natural adjustment of property prices and falling mortgage rates will see the market achieve balance on its own. Quicker rate reductions will provide more benefit than anything being proposed here.
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Ranald Mitchell
Director at Charwin Private Clients
This will be a vote winner and hugely popular. Our own company ran a small campaign for a similar 2% deposit scheme in July 2023, and the response was overwhelming. The risk to lenders is vastly diminished with the Government guarantees and the continuation of robust affordability checks. This will certainly unlock a new wave of potential buyers and mobilise many who've been trapped in the high-rent, can't save cycle.
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Craig Fish
Director at Lodestone Mortgages & Protection
This has got political desperation written all over it. Whenever their backs are against the wall the government try and fiddle with the housing market. For once, please just leave it well alone and let it find its own natural balance. Tinkering like this usually results in numerous unintended consequences.
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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.
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Riz Malik
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.
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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.
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Samuel Mather-Holgate
Independent Financial Advisor at Mather and Murray Financial
Getting a mortgage deposit is a major barrier to home ownership so this is a welcome consultation. However this government has shown no intent on housing, so it remains to be seen if they back the plans and implement a policy. Most likely, there will be little to no new policies in this area before the General Election and the Tories will continue their track record of failure for young people.
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Ross Lacey
Director & Chartered Financial Planner at Fairview Financial Management
This could certainly help those that 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. For those who are renting, they 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.
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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 reposessions. 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 governemnt is so desperate that they will latch onto any idea that wins votes despite the potential for massive negative ramifications.
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Ross McMillan
Owner/Mortgage Advisor at Blue Fish Mortgage Solutions
Any intitiaves aimed at helping specifically first-time buyers make their first steps on to the housing ladder are very welcome but demand is strong as it is and without equal measures being implemented to address the chronic under supply of suitable properties throughout the UK then schemes such as this will likely only have the effect of fuelling house price rises, intense competition and subsquently - even with a 1% deposit - raising the bar to entry once again beyond the reach of many. Specifically In Scotland, with mortgage loan-to-values most often based on the Home Report value and purchase prices often exceeding this by 10% or more, the average percentage deposit required will still sadly remain prohibitive for many.
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Graham Cox
Director at Self-Employed Mortgage Specialist SEMH
Is that it? After 14 years of presiding over a national housing crisis, fuelled by their own policies driving up rents and house prices to astronomomical levels, the best they can come up with is a 1% deposit scheme. More extend and pretend whose only purpose, aside from cynically buying the votes of the young, is to suck in gullible first-time-buyers to prop up house prices, thereby maintaining the profits of the government's financial supporters, the lenders and house builders. Negative equity, where the mortgage debt exceeds the property value, awaits for the unsuspecting. How they can even consider this when property values are still falling is beyond me. Lower house prices are the solution, not this despicable sham of a policy.
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Ying Tan
CEO at Habito
This news will certainly grab the headlines, and entice younger voters to support the government. At first glance, this is great news, and in principle the more help we can get for first-time buyers, the better. However, how will mortgage affordability be assesed? It is pointless only needing a 1% deposit if it's impossible to borrow the 99% mortgage. With a high loan-to-value comes higher risk for the lender, so rates will certainly be more expensive, giving less disposable income to the consumer. What we must avoid is reeling first-time buyers in, without thinking about the possible uninteneded consequences, leading to a potential house price bubble. Speak to a mortgage broker to understand all the implications. In alignment with these schemes, we need to build more affordable houses. It is simple economics.
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Hannah Bashford
Director at Model Financial Solutions
It’s great to see that first-time buyers are still on the political radar but in practice is this anything more than a bid to try and sway the generation rent vote? Time will tell and it will be interesting to see how in practice this could be deployed and what the terms will be. I’m glad to see that there is some innovation in the first-time- buyer space but are higher mortgages and lower deposits really the answer?
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Bob Singh
Founder at Chess Mortgages
The 1% deposit scheme seems like another half-baked, sticking plaster policy conjured up as a vote winner. But as usual the Government has failed to fully understand the real issues facing first-time buyers. It’s not always the deposit but more the fact of affordability assessments by lenders. We should allow interest-only mortgages for an initial ten years for first-time buyers before switching to capital and interest at the age of 40. This leaves 30 years still to repay the mortgage in full. 10 years should be enough for most to settle into the house and build equity , savings and a rise in income to cope with higher repayments. A 10-year fixed rate product would provide greater security for the borrower and lender. Lenders need to wake up to the problems facing first-time buyer and generation rent and devise solutions that work and not just make headlines.