New plans for 1% mortgage deals leave property and finance experts divided

Reports that the Government is considering a radical scheme to help first-time buyers by guaranteeing mortgages which would require just 1% deposit have left property and finance experts divided.

The Independent reported at the weekend that Prime Minister Rishi Sunak (main picture) and Chancellor Jeremy Hunt were considering the move to bolster the chances of first-time buyers (FTB) – and more importantly younger voters – of getting a foot on the housing ladder by guaranteeing mortgages.

MIXED REACTION

But news of the plans received a mixed reaction.

Ying Tan, Chief Executive of mortgage broker Habito, says: “This news will certainly grab the headlines and entice younger voters to support the Government.

“At first glance, this is great news. In principle, the more help we can get for first-time buyers, the better.”

But Tan told The Neg that he was concerned how mortgage affordability would be assessed.

“It is pointless only needing a 1% deposit if it’s impossible to borrow the 99% mortgage.

“With a high loan-to-value comes higher risk for the lender, so rates will certainly be more expensive, giving less disposable income to the consumer.”

And he adds: “What we must avoid is reeling first-time buyers in, without thinking about the possible unintended consequences, leading to a potential house price bubble.

“At the end of the day what this government and the next need to do is build more homes that are affordably – it’s simple economics.”

APPROPRIATE CIRCUMSTANCES

Mark Harris, Chief Executive of broker SPF Private Clients, adds: “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.”

And he says: “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.”

POLITICAL TINKERING

According to David Hannah, Group Chairman of Cornerstone Tax, a 99% mortgage scheme would amount to insufficient ‘political tinkering’ from No.10 to prop up a housing market built on unstable foundations.

He says: “These reports of a 99% mortgage loan-to-value mortgage coming from No.10 showcases the utmost desperation from politicians looking for an easy-fix to one of the most prescient issues for young voters, affordability.

“In my view, encouraging first-time buyers to take on increasingly unaffordable debts is not a viable long-term solution to Britain’s housing woes.”

And writing on X, formerly Twitter, Charlie Lamdin, Founder of BestAgent and Presenter of Moving Home with Charlie, wrote: “If they did do this, in debt addiction terms, it would be like giving a heroin addict enough money to get an overdose.

It would puff the market one more time and delay the biggest crash we’ve ever seen.”

“It would puff the market one more time and delay the biggest crash we’ve ever seen. If they do implement it so it’s available from this spring, yes it would change my -35% price fall expectations. The devil would be in the detail as always.” [sic]

But Lewis Shaw, owner and Mortgage Expert at Shaw Financial Services, countered that such a scheme ‘could be positive’ – albeit with caveats.

“The single biggest issue most FTBs face is saving the deposit at the same time as paying eye-watering rents.

“If we continue to see an exodus of the BTL market and rebalance in favour of FTBs, it could work as long as underwriting is strict and income multiples are capped to prevent house price inflation.

There will be some house price inflation.”

“It would also need to be exclusively for FTBs and no one else. Yes, there will be some house price inflation; however, it could also stimulate the big house builders to get cracking rather than sitting on land and not building as they are after the closing of HTB.

“Owning a home brings a vast range of societal benefits. Countless studies show better health outcomes for homeowners, reduced crime, and better educational outcomes for the children of homeowners; the list goes on and on.

“No, it’s not a silver bullet, and it won’t solve the problems overnight; however, it could be a touchpaper that reverses the homeownership decline, which I believe would be a positive net benefit.

“Yes, it would come with risks. No, it’s not a perfect idea, and yes, if poorly done, it wouldn’t be great.

“However, if it can be structured correctly, it could lift thousands of FTBs from the grips of insecure tenure and poor-quality housing and allow FTBs to break free of the PRS cycle that so many are often trapped in.”