First reported in the Financial Times, it is believed that this initiative will be introduced in time for the Spring Budget.
The idea was first rumoured in January and could see prospective homebuyers put down as little as a one per cent deposit for a property, while the government backs the rest of the loan.
‘Irresponsible’ idea or a ‘lifeline’?
Although industry experts have called for buyer support in the upcoming Budget in the form of the relaunch of the Help to Buy scheme or a stamp duty discount, there are mixed views on the effectiveness of a 99 per cent mortgage.
Karen Noye, mortgage expert at Quilter, said the scheme would be a “lifeline” for people struggling to raise a deposit.
“First-time buyers have had a rough ride over the past few years – house prices have risen considerably, inflation has rapidly eaten away at hard-earned savings, and high interest rates have pushed affordability, so taking a first step onto the property ladder has been pushed out of reach for many.
“A 99 per cent mortgage may provide a solution for some, but there are some serious risks to consider,” Noye added.
She added: “Given lenders such as Halifax have predicted a two to four per cent fall in house prices this year, borrowers taking out such a mortgage could be in negative equity before the year’s end.”
Noye said the monthly mortgage payments would also be higher, which would stretch affordability. She said the demand created by such a scheme could push house prices up.
Noye said: “While the introduction of a 99 per cent mortgage might be well-meaning, there could be some serious ramifications if the housing market cools as expected in the coming months and years, and potential buyers would need to weigh up the risks of using it at a time when the outlook for the property market is somewhat uncertain.”
Peter Stimson, head of product at Mpowered Mortgages, called the idea “an irresponsible attempt to grab headlines rather than create solutions, and is indicative of a government that has run out of ideas”.
He added: “A 99 per cent mortgage is, in essence, a 100 per cent mortgage – the one per cent deposit hardly contributes to preventing losses, and this will be reflected in the rates, which in all probability sit well above six per cent.
“This approach puts borrowers at significant risk of falling into negative equity and encourages poor financial decision-making. As such, this appears to be a particularly surprising decision from a government promoting a nation of investors and savers. At a time when climbing the housing ladder is already a struggle, should we really be saddling first-time buyers with even more debt?”
Daniel Austin, CEO and co-founder at ASK Partners, approved of the proposal, saying it would “reinvigorate the first-time buyer market”, which would “drive more turnover of properties higher up the chain”.
He added: “With rental prices so high, it can be hard to save for a meaningful deposit, but those managing the rents would find it easier to make monthly mortgage payments.”
