New 1% Mortgage Deposit Scheme Considered by Government
The government is deliberating on the introduction of a new mortgage scheme, which would require only a 1% deposit, as part of the upcoming budget announcement by Chancellor Jeremy Hunt in March.
Typically, mortgage lenders ask for a 10% deposit, although options with 5% deposits exist. The introduction of this low deposit mortgage is seen as a strategy by the Conservatives to appeal to younger voters in anticipation of the forthcoming general election, expected to occur this year.
"Mortgages with a 99% loan-to-value ratio could be beneficial under certain conditions."
It is noted that the combination of stamp duty expenses and the near impossibility of saving for a deposit while renting makes such mortgages comparable to the 95% mortgages of previous generations. However, you should be warned of potential downsides, such as the risk of negative equity if property values decline, which would be an issue only if one needed to relocate.
Would the proposal of a 1% deposit significantly lower the initial cost of purchasing a house?
Under the new scheme, a buyer looking at the average UK house price of £290,000 would only need to pay £2,900 as a deposit. However, this doesn't guarantee an improved financial outlook for young people in the UK. Mortgages with low deposits often come with higher interest rates compared to those with bigger deposits, due to the increased risk to the lender.
With gradual property price increases and consistent mortgage repayments, equity is built over time, thereby decreasing the loan-to-value ratio.
There are also 100% mortgages, like the Skipton Track Record and Barclays Springboard.
| Mortgage | Description |
| Skipton Track Record | Long-term rent payment history in its affordability assessments. |
| Barclays Springboard | Involves equity in a guarantor’s property, resulting in a lower net loan-to-value. |
Might this proposal influence the property market?
Industry professionals warn that the novel approach of requiring only a 1% deposit could unintentionally trigger a rise in property prices, potentially causing harm. Simplifying the buying process might initially stimulate the market.
Yet, this increased demand, paired with a finite number of available properties, could lead to a sharp escalation in prices.
This would, in turn, make it more difficult for the next generation of young purchasers to afford housing. The Home Builders Federation supports the idea of a scheme backed by the government that promotes new housing developments, pointing to the effectiveness of the Help to Buy program in invigorating the UK's building industry.
Current lenders conduct more rigorous affordability and stress tests compared to the past, reducing the risk of borrowers overextending financially.
However, it is acknowledged that critics might argue that this policy would increase housing demand without addressing supply, potentially leading to higher house prices.
