"The growing disparity between house prices and wages means that the maximum amount an average couple could borrow at 99% LTV would not be enough to buy even a starter home in 90% of the country."
- Stephen Perkins, managing director at Yellow Brick Mortgages
The government is reportedly considering the launch of 1% deposit mortgages to help first-time buyers onto the housing ladder.
Government sources said a new government-backed scheme is being considered following the end of Help to Buy, with the announcement planned for the Spring Budget on 6th March.
But would 99% LTV mortgages increase first-time buyer activity or risk creating a housing bubble?
Mortgage brokers were split on the decision, with some saying that the mortgages are similar to 95% LTV mortgages already widely available in the market, but others warning that the scheme could leave buyers exposed to negative equity.
"The 99% mortgage idea could be exactly what is needed"
Kylie-Ann Gatecliffe, director at KAG Financial, said: "One of the biggest issue we see as brokers is first time buyers unable to make the leap onto the ladder because they don't have enough deposit. Rents are constantly rising along with the cost of living, so buyers being able to save a large amount on a regular basis is not something we see very often. So with this in mind, the 99% mortgage idea could be exactly what is needed. But we must be mindful that a scheme like this would definitely increase the amount of purchases taking place, which could push house prices up even further. It is very difficult to bring forward a solution to help more buyers onto the ladder without causing too much demand. Whilst this may be seen as a ploy to gather more votes from those yearning to obtain their first property. It will be interesting to see whether this could materialise into something that helps a lot of people currently stuck renting."
Mark Harris, chief executive of mortgage broker SPF Private Clients, commented: “99% mortgages could be a good idea in the appropriate circumstances.
“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. 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.
"There are 100% mortgages available today – for example, Skipton Track Record, which uses the evidence of long-term rent payments as part of its affordability basis and assessment. Also, Barclays Springboard, albeit using equity in a guarantor’s house, so net loan-to-value is lower.
"Unlike 100% mortgages in the past, lenders now have more stringent assessments to perform to assess affordability and stressing. There is less risk of borrowers over-stretching themselves.
"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."
James Bull, mortgage broker at JB Mortgages, added: "The housing market is intertwined with the whole outlook of British people. When the housing market is doing well then everything tends to do well due to the feelgood factor. Plus many tens of thousands of peoples livelyhoods are linked to property and housing. Anything the government can do to make it easier for people to get on the property ladder has to be welcomed. I think mortgages with a 1% deposit is a great idea, but if 1% deposit mortgages are offered, why not just go the full hog and offer 0% deposit mortgages. Affordability checks are as stringent as they have ever been so if someone can afford the payments then why not!"
"Affordability and stress testing is more the issue than the deposit"
Ying Tan, CEO at Habito, commented: "Any efforts generally, to help first time buyers onto the housing ladder are always welcome. However the devil is in the detail, and we must be mindful of any unintended consequences, and ensure it is not just a political move to secure votes. Interest rates are likely to be higher for a 99% mortgage, along with more stringent underwriting. How realsitic will it be for a consumer to only need 1% deposit, given the likely affordability challenges for getting the 99% mortgage? In addition to such schemes, it's imperative the governement tackle the underlying challenge of a lack of affordable homes, otherwise a housing bubble will be created. This could push prices up further, beyond the grasp of a first-time buyer."
Stephen Perkins, managing director at Yellow Brick Mortgages, said: "The scheme will look good in the headlines for a governent looking for votes from generation rent in the upcoming election, but will sadly help very few borrowers overcome the needed hurdles to house ownership. Whilst many do struggle to raise deposits, the growing disparity between house prices and wages means that the maximum amount an average couple could borrow at 99% LTV would not be enough to buy even a starter home in 90% of the country. Like the 100% scheme already available, it will generate many enquiries but then go on to disappoint many of them with the reality that taking away one barrier, still leaves many others on the housebuying steeplechase course."
Graham Cox, founder at Self Employed Mortgage Hub, was pessimistic about the news, stating: "House prices are falling and the government thinks it's a good idea to allow 1% deposit mortgages? Complete madness. Another lame duck policy initiative designed to buy Generation Rent's vote, whilst leaving them badly exposed to negative equity and doing nothing to address the underlying issue, that house prices are too high. This administration is utterly cynical and shameless in its desperation to cling to power."
Amit Patel, adviser at Trinity Finance, said: "Another ill-thought out idea by a party now desperate to cling into office. This scheme is a recipie for disaster. On paper it sounds like a fantastic proposition but this will only inflate house prices even further and I expect the interest rates will be steep. You then have the issue with the affordability calculations coupled with negative equity should house prices fall in future."
Michelle Lawson, director at Lawson Financial, agreed, adding: "Yet another desperate attempt at a vote-catcher rather than coming up with something with serious legs but the devil, as always, is in the detail. Affordability and stress testing is more the issue than the deposit for first-time buyers in most areas due to the house prices. A 1% deposit is dangerous as most would take a long term of say 30, 35 even 40 years so the borrowers actually pay little off in the early years so there is a high risk of either negative equity or being a mortgage prisoner if not modeled correctly. Serious thought should be given to some of the most vulnerable buyers and the focus should be on housing being a senior department rather than using it as an election bribe."
