The Treasury is drawing up plans for a 99% mortgage scheme ahead of next month’s Budget.
The move would see home buyers able to put down a 1% deposit on their first home, with the government backing the overall loan, according to a report in the Financial Times.
First-time buyers would be helped by the measure, which would allow them to 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 month.
This would see homebuyers putting down a deposit of £2,855 to secure a property under these proposals.
Chancellor Jeremy Hunt has been lobbied to include a range of options to extend homeownership in his 6 March fiscal statement, which cover extending current stamp duty cuts, reducing inheritance taxes, and allowing people to dip into pensions for deposits.
However, the 1% deposit scheme appears to be at a more advanced stage, according to the newspaper.
It says: “Although government figures cautioned no final decision had been made, they said the new Treasury-backed mortgage scheme was likely to be in the Chancellor’s March 6 Budget.”
However, the property industry is divided over the plan, which would boost FTB lending, but also risks pushing up house prices, or leaving homebuyers in negative equity – criticisms that were levelled at the government’s long-running Help to Buy scheme which ended last year.
MPowered Mortgages head of product Peter Stimson says: “The Chancellor’s move to introduce 99% loan-to-value mortgages is an irresponsible attempt to grab headlines rather than create solutions and is indicative of a government that has run out of ideas.
“A 99% mortgage is, in essence, a 100% mortgage – the 1% deposit hardly contributes to preventing losses, and this will be reflected in the rates, which in all probability sit well above 6%.
“This approach puts borrowers at significant risk of falling into negative equity and encourages poor financial decision-making.”
But Perenna chief executive Arjan Verbeek points out: “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. The key is to remove market risk from borrowers, which traditional mortgage products can’t deliver.”
The head of the long-term lender adds: “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 long-term fixed-rate mortgages should be exempt because payments are fixed for term duration.”
ASK Partners chief executive and co-founder Daniel Austin says: “This is positive news for the housing market as it will serve to reinvigorate the FTB market, consequently driving more turnover 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.”
“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.”
The Labour Party has pledged to build 1.5 million homes over five years, which will involve green belt development, if it wins the general election, widely expected this year.
