Government’s 1% Deposit Mortgages Could ‘fuel House Price Bubble’

Rishi Sunak

Rishi Sunak’s government is expected to unveil plans to help tens of thousands of young people onto the property ladder by introducing new 1% deposit, or 99% loan-to-value (LTV), mortgages as part of its latest housing strategy to boost homeownership ahead of this year’s general election.

Reports over the weekend suggest the PM could pave the way for the country’s generation of renters to become a generation of homeowners instead with a new initiative, which could be announced in the spring Budget on 6 March, aimed at removing the financial barrier to homeownership of high deposits, with the UK government guaranteeing the mortgages.

Economists and housing experts warned that such a scheme could create “massive risk” for taxpayers and would push up prices.

Peter Stamford, mortgage commentator at The Mortgage Uni, said: “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.”

Buckland added that the problem of overheating the market could be avoided “by ensuring that mortgages are easily available for new homes built by modern methods of construction”.

David Sharpstone, director at CIS Mortgage Advice, commented: “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.”

Andrew Montlake, managing director at Coreco, remarked: “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.”

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.”

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.”

Bob Singh, founder at Chess Mortgages, said: “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 buyers and generation rent and devise solutions that work and not just make headlines.”

Charles Breen, founder at Montgomery Financial, added: “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.”

Here are average 2023 seller gains, according to Hamptons, with the percentage of people selling their home for more than they paid, the average cash difference between the sale and purchase price, the average percentage difference between the sale and purchase price and the average years of ownership:

– London, 88%, £204,190, 51%, 9.5

– South East, 94%, £134,870, 48%, 9.0

– East of England, 95%, £115,310, 49%, 8.7

– South West, 95%, £110,510, 48%, 8.3

– West Midlands, 94%, £79,350, 46%, 8.6

– East Midlands, 95%, £78,130, 49%, 8.6

– Wales, 95%, £71,470, 53%, 8.9

– North West, 92%, £66,570, 48%, 8.9

– Yorkshire and the Humber, 93%, £63,800, 44%, 8.9

– North East, 87%, £40,410, 33%, 8.0