There have been more suggestions from Conservative party that a government-backed 99 per cent mortgage will be launched next month.
Government insiders told the Financial Times it is “likely” the scheme will be included in the Spring Budget, which is due to be delivered by Chancellor Jeremy Hunt on March 6.News that prime minister Rishi Sunak was reportedly considering the 99 per cent mortgage first broke in the Independent last month.
Writing for the Evening Standard, former government advisor Ben Ramanauskas called it “one of the very worst policies of any government ever”.
Details on the scheme are scant, but the idea is that it would remove one of the major hurdles — saving for a deposit — for would-be first-time buyers trying to get a foot on the ladder by allowing them to do so with just a one per cent deposit.
Housing is set to be a major issue in the 2024 UK election, and the Budget is expected to deliver some sweeteners for buyers and builders following disappointment that the property industry was largely ignored in the 2023 Autumn Statement.
But while some have welcomed the proposal as a much-needed boost for first-time buyers, others have warned it could inflate house prices and put homeowners at risk of negative equity.
What is a 99 per cent mortgage?
A 99 per cent loan-to-value (LTV) mortgage would involve lenders such as banks loaning buyers 99 per cent of the agreed sale price.
The buyer would only have to find one per cent of the house price to put down as a deposit against the loan.
The government currently underwrites a different scheme for 95 per cent mortgages, where buyers need to save five per cent for a deposit.
Outside of this scheme, most lenders expect a deposit of at least 10 per cent to secure a mortgage, and rates are becoming increasingly competitive the lower loan to value needed to buy.
The best rates currently available – around four per cent interest – are available to those with a deposit of at least 40 per cent.
How much could it cost a London first-time buyer?
The average asking price for a London home is now £664,550 while even typical first-time buyer prices are nudging £500,000.
First-time buyers can only claim relief from Stamp Duty Land Tax (SDLT) on a property worth up to £425,000, and the government’s Lifetime ISA saving scheme can only be used to purchase a house worth £450,000 or less.
A one per cent deposit on a home costing £425,000 would be £4,250.
This is significantly lower than the average first-time buyer deposit in London, which is currently £113,078, according to estate agent Hamptons.
However, applying the traditional mortgage metric of lending 4.5 times someone’s salary, a single person attempting to borrow £420,750 would need a salary of at least £93,500 a year before tax.Skipton Building Society already offers a five-year fixed-rate 99 per cent mortgage with an initial rate of 5.35 per cent, before rising to 6.79 per cent. Monthly repayments would be set at £2,696 a month for five years.
Lloyds Bank offers those with a Club Lloyds account a 99 per cent mortgage 25-year mortgage that is fixed at repayments with an interest rate of 5.03 per cent for three years, before rising to 8.74 per cent. The homeowner would pay £2,612 a month for the first three years.
What are the potential benefits?
First and foremost, not having to save tens of thousands for a deposit while paying rent in London – where the average room costs over £1,000 a month.
“This will be a vote winner and hugely popular,” said Ranald Mitchell, director at Charwin Private Clients.
“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.”
But most cautious optimists voiced their approval for the concept with caveats.
“99 per cent mortgages could be a good idea in the appropriate circumstances,” said Mark Harris, chief executive of mortgage broker SPF Private Clients.
“Saving for a deposit while renting is practically impossible, [so] 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.”
Kirsty Wells, director of Blueprint Mortgages & Protection, recalled finding herself in negative equity when the 100 per cent mortgage on her first home in 2004 left her in negative equity when house prices crashed in 2008.
“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,” said Wells.
“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.”
What would the risks be?
For Londoners, high house prices mean it’s not just saving for a deposit that’s a barrier, but passing affordability checks to get a mortgage.
“These proposals would help first time buyers afford a deposit, but they don’t fix the issue of affording a home,” said Emma Humphreys, a partner at law firm Charles Russell Speechlys.
“This fundamental issue comes back to supply and demand. The government simply needs to build more affordable housing, rather than announce temporary measures which are sticker plasters covering the real issue”.
As mentioned above, the spectre of negative equity looms larger when the mortgage is bigger.
Negative equity occurs when falls in the property market mean your house is worth less than what you mortgaged it for.
If you need to sell your home for less than you bought it, you have to get your mortgage lender to agree to let you pay off the shortfall.
“As a mortgage broker, it’s easy to be hopeful about short-term wins, but I also worry about the dangers of negative equity,” said David Sharpstone, director at CIS Mortgage Advice.
“Such a small deposit will leave borrowers very exposed.”
This is something that London first-time buyers would need to pay special attention to, as house prices in the capital have fallen around 6 per cent in the past year and could keep falling.
“It is right that politicians are trying to boost home ownership for people with limited savings, but any schemes need to be carefully designed,” Ben Twomey, chief executive of Generation Rent told Homes & Property.
“People using schemes like this need protection from the damaging effects of negative equity should house prices fall, which would potentially lead to resentment of having been mis-sold home ownership.”
There are also fears that house prices could be pushed up artificially, as sellers take advantage of a new wave of potential buyers taking advantage of a 99 per cent mortgage.
“They need to avoid flooding the market with finance that competes over a limited supply of homes, which will push up prices and ultimately hurt the prospects of home ownership for people who continue renting,” said Twomby.
“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,” said Charles Breen, founder of Montgomery Financial.
“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.”
Is there a historical precedent?
Before the financial crash of 2008, it was not unheard of to get a mortgage for more than 100 per cent of the price of the property, meaning buyers would not need to save for a deposit and would have money to put towards furnishing and renovating their new home.
When house prices were rising, people who sold up at the right time stood to make a profit.
But when the market crashed, many found themselves in negative equity and serious debt.
What alternatives could the government consider?
Twomby suggested that a form of Right to Buy for private renters could help both landlords facing higher mortgage repayments and their at-risk tenants.
“One opportunity politicians should seize is to help renters whose landlord is struggling with high interest rates and looking to sell,” he said.
“Instead of being callously evicted, which is what happens currently by default, we should have the opportunity to buy our landlord out on favourable terms.”
Rohit Kohli, director of The Mortgage Stop, warned that higher loan to value mortgages would do little to solve the underlying causes of the housing crisis.
“Let’s be honest, it feels a bit like slapping a plaster on a gaping wound,” said Kohli.
“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.”