What 1% deposit mortgages could mean for first-time buyers… and the housing market

• Government is reportedly considering 1% mortgage scheme for aspiring buyers
• It could help those struggling to save – and perhaps boost housing market 
• But repayments on small-deposit mortgages are high – and negative equity a risk

The Government is said to be considering introducing a scheme that would allow first-time buyers to get on the property ladder with just a 1 per cent deposit.

The initiative could be announced in the Spring Budget on March 6 to help those struggling to build up enough savings to buy a home, according to a report in the Independent. 

It could see the Government offer banks financial guarantees to encourage them to hand out mortgages covering 99 per cent of a home’s value.

This would be similar to the existing Mortgage Guarantee Scheme, which aims to help those buying homes with 5 per cent deposits.

If it is confirmed, the policy would no doubt be welcomed by some first-time buyers. 

However, critics say that it could also push up house prices, and that struggling first-time buyers may not be able to afford the monthly repayments required on such a large mortgage, especially as rates remain relatively high. 

How could it help first-time buyers?

There is little detail on the scheme, but in theory it should mean aspiring homeowners will be able to buy their first home with an even smaller deposit.

Someone buying a £300,000 property with a 5 per cent deposit needs to have built up savings of at least £15,000 to get a 95 per cent mortgage. 

Under the new scheme, they may need as little as £3,000 – alongside the funds required for a solicitor, surveyor and potentially a mortgage broker. 

David Hollingworth, associate director at L&C Mortgages says: ‘This would likely open up an alternative option for first time buyers struggling to build a deposit. 

‘Requiring a smaller deposit could help accelerate the ability to buy, for those that can fund the remainder from mortgage borrowing.’

Mark Harris, chief executive of mortgage broker SPF Private Clients, adds: ‘The 99 per cent mortgages could be a good idea in the appropriate circumstances.

‘With added stamp duty costs, a 99 per cent mortgage can look identical to a 95 per cent mortgage for previous generations. 

‘Add in the fact that saving for a deposit while renting is practically impossible, and this could be a solution.’

Will it make property more affordable? 

Buyers are likely to find their ability to get a 1 per cent deposit mortgage is dependent on their earnings.  

Many first-time buyers are not only priced out of the property market because of the deposit required, but because of how much they are able to borrow.

All mortgage lenders limit borrowers to a maximum loan-to-income ratio. 

This is a cap on the amount banks will lend based on the borrower’s annual income. They are able to offer some loans above this level, but there are tight restrictions on how many.

 If a single person was buying a £300,000 property with a 1 per cent deposit, they would typically need an annual income of at least £66,000

As a general rule of thumb, most first-time buyers will find themselves limited to a maximum of 4.5 times their annual income.

If a single person was buying a £300,000 property with a 1 per cent deposit, they would typically need an annual income of at least £66,000.

David Hollingworth adds: ‘There will still be reasons why this wouldn’t be an option for many, as they may also be limited by the mortgage amount that they can borrow, as well as the challenge of saving a bigger deposit. 

‘Lenders will need to see that the mortgage amount is affordable based on income and outgoings and subject to certain income multiple limits. 

‘That can see borrowers requiring an even bigger deposit to bridge the gap between the mortgage and the amount that they have to pay for the property. 

‘That issue certainly doesn’t disappear at 99 per cent loan to value mortgage, so could affect the number that can take advantage.’

Would it be popular? 

There are some doubts over whether many first-time buyers would actually sign up to a 99 per cent mortgage deal.

The average deposit put down by a first-time buyer last year was around 25 per cent, according to UK Finance.

Meanwhile, the average first-time buyer is borrowing at 3.36 times their annual income, which is significantly under the maximum they would typically be allowed to borrow at.

This suggests buyers are keen not to overstretch themselves when it comes to buying their first home. 

Are similar mortgages already available?  

Skipton Building Society made headlines last year when it launched a 100 per cent mortgage for renters to enable them to get onto the property ladder without a deposit.

Another product that allows first-time buyers to get on the ladder without a deposit is the Barclays Springboard mortgage, albeit this requires family and friends can help with the deposit.

In this case, the helper provides a 10 per cent deposit as security for five years and it’s placed into a Helpful Start account that earns interest and is returned after five years.

However, it is thought that there has been limited uptake for these types of products.

Chris Sykes, technical director at mortgage broker, Private Finance, says: ‘My concern is this latest Government scheme is going to give false hope to many where the real ins and outs of the policy will not make it actually feasible.

‘It is worth mentioning that 100 per cent mortgages exist, from Skipton to other schemes where family members can act as guarantor. 

‘My issue with these schemes is, just because you can afford rental payments at say £1,500 per month, doesn’t mean that you can afford a mortgage payment at £1,500 per month. 

‘This is because home ownership has a number of other costs to consider: building insurance, the property repairs your landlord would have done, and so on. 

‘If you were not able to save for a deposit while paying this rent, then can you afford the associated costs of having a property?’

How expensive will they be? 

The other concern shared by some across the mortgage industry is the fact these products will likely come with higher rates, given there is greater risk for the lender.

The average five-year fixed rate mortgage rate for someone buying with a 40 per cent deposit is 4.74 per cent, compared to 5.41 per cent for someone with a 5 per cent deposit, according to Moneyfacts.

 With virtually no deposit, the price of these mortgages will be reflected in the risk, i.e they will be very expensive  Peter Stimson, MPowered Mortgages

That’s the difference between paying £1,139 a month and £1,217 a month, based on a £200,000 mortgage over 25 years. 

The rates would probably be higher for those buying with a 1 per cent deposit. 

Peter Stimson, head of product at MPowered Mortgages says: ‘We really don’t think 1 per cent deposit mortgages are a good idea. It’s just another gimmick initiative that is doomed to fail. 

‘With virtually no deposit, the price of these mortgages will be reflected in the risk, i.e. they will be very expensive. 

‘Instead, the Government should be focused on fixing the fundamental issue, which is a lack of housing stock and affordable housing.’

David Hollingworth of L&C Mortgages adds: ‘The guarantee will no doubt carry a cost and that will pull through into the pricing of the mortgage rates. 

‘As you’d expect if we do see 99 per cent mortgages we’d expect that interest rates will be higher than for those with bigger deposits. 

‘That then makes it a balance of whether the price is worth paying for the increased ability and timeline for buying. With rents so high that higher interest rate could still be worth taking on.’

Threat of negative equity 

There are also concerns about the rumoured scheme resulting in more first-time buyers running the risk of falling into negative equity in the future, if house prices fall.

UK house prices recently recorded their fastest annual fall since 2011, according to the Office of National Statistics.

According to the data, the average sold price fell by 2.1 per cent in the 12 months to November 2023.

Negative equity is when a home becomes worth less than the remaining value of the mortgage. 

If that happens, the owner may be left unable to remortgage, and in some cases be forced to sell their home to pay the bank. 

Rising house prices 

Government interventions such as these often appear to add fuel to house prices.

Stamp duty holidays, Help to Buy, Right to Buy and other schemes were also all meant to help more people on to the ladder.

But while many of those initiatives were successful, they also had the effect of pushing up house prices further for those that came after.

Hollingworth adds: ‘The potential downside is that if you boost the demand without improving the supply, you risk pushing prices even higher.

Chris Sykes agrees: ‘I think we’ll have to wait and see where they pitch the scheme, but it is somewhat avoiding the main issue of there not being enough houses.’