How would low deposit mortgages impact the housing market?
The UK government could be preparing to introduce low deposit mortgages (1%) in its upcoming budget – eyeing up so-called ‘generation rent’ ahead of the upcoming election. With UK house prices at a historic high, Chancellor Jeremy Hunt could soon unveil a package aimed at getting more young people on the increasingly difficult-to-climb housing ladder.
According to a report by The Independent, the rollout of low deposit mortgages is being ‘seriously considered’ by the Treasury ahead of the chancellor’s spring budget. If approved, it would mean first-time buyers would be able to purchase a house with just a fraction of the deposit saved up than would typically be required – the average first-time buyer deposit is currently 15%.
What help is available for first-time buyers?
A 1% mortgage would serve as a replacement for the ‘Help to Buy’ scheme, which David Cameron’s government introduced to help young people onto the housing market by allowing purchases with as little as a 5% deposit. But the scheme ended in 2023 amid critics’ claims that the initiative was propping up inflated house prices.
A 1% mortgage would mean a £200,000 house could be purchased with just a £2,000 deposit. But as The Independent reports, buyers could face high interest rates as a result:
“Lenders will be wary, even if the scheme is aimed at the most credit-worthy of young buyers. The smaller the deposit, the greater the risk. The government may offer to underwrite a portion of the loan, but banks and building societies could look for additional capital buffers to support 99 per cent mortgages.
“From a lender’s point of view, such low deposits mean borrowers have less capital invested in the building. So, if prices fall, there is less incentive to stay in the property because the borrower would only be losing a 1 per cent equity stake.”
Will house prices rise in the UK?
Echoing criticism levelled at the Help to Buy scheme, some analysts believe introducing 1% mortgages could cause house prices to soar. Speaking to Newspage, mortgage expert Peter Stamford warned that the proposals risk ‘overheating’ the property market if enacted. Commenting, he said:
“1% deposit mortgages are reported to be the Conservative Government’s latest plan to entice ‘Generation Rent’ voters, ahead of a General Election. This radical approach to dismantling the towering barriers to homeownership will sound fantastic to those struggling to find a larger deposit.
“However, it will likely come with a sting in the tail, namely higher interest rates. There is also a risk it could once again cause the property market to overheat, driving prices up further. It’s a high-stakes gamble and could potentially fuel yet another house price bubble.”
It was a view shared by David Sharpstone, a director at CIS Mortgage Advice, who said concerns over the ‘sustainability and impact’ of 1% mortgages are valid. Commenting, he stated:
“The proposal for 1% deposit mortgages, aimed at assisting ‘generation rent’ in owning homes, presents an innovative yet complex solution to the affordability crisis in the housing market.
“While this approach significantly lowers the barrier to entry for first-time buyers, concerns about its long-term sustainability and impact on the market are valid. It’s crucial to consider its potential to once again significantly inflate property prices and increase financial risk for both lenders and borrowers.”
However, some analysts took a more upbeat note over the proposals. Cited in the Financial Times, Ranald Mitchell of Charwin said:
“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.”
Should I take advice before taking out a mortgage?
Whether the government rolls out a 1% mortgage scheme or not – it is recommended that you take advice before taking out any kind of mortgage. According to the UK government’s financial advice service Money Helper, failing to take advice before taking on a mortgage can be fraught with risk.
Engaging a mortgage advisor offers additional advantages, such as a thorough assessment of your finances to ensure alignment with individual lenders’ criteria, access to exclusive lender deals, assistance in expediting the paperwork, and comprehensive consideration of all costs and features beyond the interest rate. A reputable adviser will recommend only mortgages suitable for your circumstances and guide likely approvals.
Will low deposit mortgages help first-time buyers?
The prospect of 1% mortgages presents both opportunities and challenges for first-time buyers navigating the complex landscape of homeownership.
On the positive side, 1% mortgages would lower the barrier to homeownership, making buying a house more accessible for first-time buyers. However, critics fear such an initiative could drive up house prices – exacerbating issues in the long term and resulting in first-time buyers being saddled with high monthly repayments. As with any financial decision, thorough research, careful consideration of personal circumstances, and a long-term perspective are indispensable for prospective first-time buyers navigating the evolving landscape of mortgage options.