Brokers warn government plans to allow borrowers to buy a home with a 1% deposit may inflate house prices at a time of tight demand.
Prime Minister Rishi Sunak and Chancellor, Jeremy Hunt are considering proposals that would see prospective homeowners put down mortgage deposits of just a few thousand pounds to buy a home.
The idea is being discussed as a potential measure in the Chancellor’s Spring Budget on 6 March, according to a report in the Independent yesterday.
The move, if approved, would go further than the 5% deposit previously required as part of the Help to Buy scheme, which ended last March.
The measure is designed to help first-time buyers get onto the property ladder, without having to save tens of thousands of pounds for a 10% or 15% deposit.
The average cost of a home is £285,000, according to Office for National Statistics data released last week.
This would see homebuyers putting down a deposit of £2,855 to secure a property under these proposals.
However, brokers point out that the move could push up house prices, or leave homebuyers in negative equity – criticisms that were levelled at Help to Buy.
MPowered Mortgages head of product Peter Stimson says: “We really don’t think 1% deposit mortgages are a good idea. It’s just another gimmick initiative that is doomed to fail.
“With virtually no deposit, the price of these mortgages will be reflected in the risk — they will be very expensive.
“Instead, the government should be focused on fixing the fundamental issue, which is a lack of housing stock and affordable housing.”
Heron Financial founder Mark Coulson adds on LinkedIn: “The market has largely been providing low deposit solutions over the last few months with 95% mortgages widely available and some lenders even allowing 100% mortgages.”
“Should we not be looking more closely at planning legislation to make things easier for builders to get more good quality homes in the market?
Coulson points out: “Can we also not consider the tax system to allow empty nesters to gift deposits — and properties — to FTBs? Or, allow them to sell on the open market in a more tax-efficient way?
“Surely a more consistent, reliable environment with fewer peaks and troughs is synonymous with a stable economy and can only come about with brave long-term political thinking
“I’m not sure pushing up demand — and ultimately prices — is what the property market needs right now.”
SPF Private Clients chief executive Mark Harris says: “With added stamp duty costs, a 99% mortgage can look identical to a 95% mortgage for previous generations. Add in the fact that saving for a deposit while renting is practically impossible, this could be a solution.
“There are negatives to consider of course, such as finding yourself in negative equity if house prices were to fall.
Harris adds: “This would only become relevant if you needed to move but assuming gradual house price inflation and a repayment mortgage where you chip away at the balance each month, equity will be gradually created over time, reducing the loan-to-value.”
“Naysayers will no doubt focus on the fact this is a policy to increase demand for housing not supply so inevitably the effect on house prices will be upwards.”
Currently, Skipton Building Society’s Track Record home loan, offers a 100% mortgage, using the evidence of long-term rent payments as part of its affordability tests. Also, Barclays’s Springboard also offers a 100% loan, although this uses the equity in a guarantor’s house, lowering the net LTV.
The government also runs a mortgage guarantee scheme, which mainly helps first-time buyers with 5% deposits to buy a home.
It has been used in 39,253 mortgage deals since it was introduced in April 2021 to the end of June, which represents 1.6% of all residential mortgage completions, according to Treasury data released in November.
