1% deposit mortgages: a good option for first-time buyers?

The government is reportedly considering introducing 99% loan-to-value (LTV) mortgages in a bid to support first-time buyers and boost the property market. 

According to The Independent, Chancellor Jeremy Hunt is mulling the "bold plan" to announce 1% deposit mortgages in his Spring Budget in March, as the Conservatives seek to "give young people a reason to vote Tory".

Housing is expected to become one of the "major battlegrounds" in the run-up to the next general election, which is likely to take place this autumn, said The Guardian's banking correspondent Kalyeena Makortoff. But while a 1% deposit mortgage would "undoubtedly" help some of "Generation Rent" get on the housing ladder, ministers are being warned of the potential risks and consequences of "pushing" more buyers into the property market.

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How would 1% deposit mortgages work?

The government might offer "financial guarantees" for banks, said This is Money, to "encourage them to hand out mortgages" covering 99% of a property's value. 

If approved, said The Guardian's Makortoff, the scheme would "go even further" than the now defunct Help to Buy scheme, which required a 5% deposit to purchase a new-build.

Rather than having to save "tens of thousands", said The Independent, 1% deposits could "make the home ownership dream a reality" with far less cash. The average house price is £284,950, according to the Land Registry, so a first-time buyer would need £2,843.50 under such a scheme.

Are 1% deposit mortgages a good idea?

Although a 99% mortgage would help "address the issue of finding money for a deposit", said The Independent, it wouldn't "magically secure" the future for young people. Lenders would probably charge higher interest rates to compensate for the greater level of risk, and house prices are "still high".

And mortgage brokers have warned that the "high-stakes gamble" could fuel a house price bubble that made home ownership even more unaffordable for future would-be buyers. Peter Stamford, the founder of Moor Mortgages, told The Intermediary that the initiative could "cause the property market to overheat, driving prices up further". 

A growing number of borrowers could then be left in negative equity – when the value of the property falls below the size of the loan.

Brokers have warned that borrowers could face "unmanageable debts similar to those still carried by some buyers who were offered 100%-plus mortgages", which were worth more than the value of the home, during the 2008 financial crash, The Guardian's Makortoff reported.

High LTV mortgages are already a "niche" product, said Zoopla's research director Richard Donnell, and "the reality is that many first-time buyers do not want to put down just 1% or 2%".

The “challenge" with small deposit schemes is that affordability testing will "still likely apply”, added Donnell, and borrowers would need to be on a "very high income" to afford a London home with a 5% deposit and the subsequent mortgage repayments. Even at 1%, many would still struggle, especially if house prices rose further. 

Rather than another government-backed mortgage scheme, suggested Donnell, "building more homes for sale and rent" could keep house prices and rents in check, helping first-time buyers to save for a deposit while improving choice for all.