Bombshell 1% mortgage change could shock house price market – what it means for you

Rishi Sunak is considering a radical plan to allow first-time buyers to take out a mortgage with a 1% deposit.

In a bid to appeal to young voters, the PM and Chancellor Jeremy Hunt are considering a mortgage guarantee scheme to help people get onto the property ladder. It would mean someone buying a house at the average UK house price of £288,000 would need to put down a deposit of £2,880.

But experts warn a shortage of housing means the scheme could end up driving the cost of new homes. Currently the mortgage guarantee scheme allows first-time buyers to take out a mortgage with a 5% deposit. Mr Hunt extended the plan to June 2025 in his Autumn Statement. He is now looking at extending it further by lowering guaranteed deposits in his spring Budget on March 6, the Independent reported.

Experts warned the bold idea to create 1% deposits could be a “short-term” fix as it does not address housing shortages and could push up house prices. The Government has repeatedly failed to meet their manifesto pledge to build 300,000 new homes. According to figures published in November, some 234,397 new homes were supplied in England in 2022/23.

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Jonathan Rolande, founder of the National Association of Property Buyers said: “In the short-term it may produce a honeymoon where some young people who could not afford to [before] get on the ladder and are very happy. Giving people money to go out and buy, it means they are all competing with each other for the same limited number of homes, so it will push up prices. In a few years’ time we’re back with the same problems – a shortage of housing.”

Labour’s Deputy Leader Angela Rayner said the Tory government had “completely failed to address the supply of affordable homes, or lift a finger to reform our broken planning system which has forced a generation of young people to give up on the dream of home ownership”. Asked about the Tory proposal for 1% deposits, she told the newspaper: “The truth of this issue is that you can’t have a serious housing policy without a real plan to drive up supply.”

Britain has continued to pay the price of of Liz Truss’s mini-budget, which sent mortgage rates spiralling. Mortgage approvals have only just started to recover. They hit their highest rate in six months near the end of last year, after lenders cut rates. Housing prices dropped at their fastest rate in more than a decade in November. This was due to stubbornly high mortgage rates, which remained high after the Bank of England hiked interest rates to try to tackle inflation.

The Tories are grasping at ways to appeal to young voters. A recent YouGov poll showed just 10% of voters under 50 plan to vote Conservative at the next general election.

What could the scheme mean for you?

The current existing 5% deposit mortgage guarantee scheme allows buyers access to 95% loan to value (LTV) mortgages – meaning you need a 5% deposit – on properties worth up to £600,000. You must have a deposit equivalent to between 5% and 9%.

The scheme was launched in April 2021 to increase the number of 5% deposit deals on the market, following the pandemic. It was extended for 12 months in 2022 and was due to end in December 2023. It will now run until June 2025.

The new scheme reportedly being considered would see buyers having access to 99% LTV mortgages – with a deposit of just 1% required up front. As it can be risky for lenders to loan such a large proportion to would-be buyers, the Government provides a guarantee to reduce the risk. It means it is willing to compensate the bank or building society if the owner falls behind on payments or if the property is repossessed.

But it should be noted that a lower deposit means mortgage rates tend to be much higher. In his analysis of the current 5% mortgage guarantee scheme, Money Saving Expert Martin Lewis warned people to push for a 10% deposit if they can because they’ll get access to much cheaper mortgage repayments and fees.