Mortgage news

In a bid to help first-time buyers onto the property market, the Government has suggested that it is considering rolling out a Treasury-backed 99% loan-to-value (LTV) mortgage scheme. This means that any buyer using the scheme only needs a 1% deposit to be able to purchase a home.

How does the 99% mortgage work?

In the South West, the average cost of a first home is £220,000. Usually, banks and other lenders would – at a minimum – require a 5-10% deposit. This would mean first-time buyers needing to save between £11,000 and £22,000 (plus solicitor fees) before they can, realistically, begin house hunting.

However, in today’s economic climate with climbing costs, sky-rocketing rent, and rising house prices, first-time buyers can expect to need to save for at least 10 years before they can build up a large enough deposit.

Therefore, it comes as no surprise that the idea of a 1% mortgage is very attractive. The same first-time buyer looking at a £220,000 house would only need a deposit of £2,200 under the new scheme.

However, is this all too good to be true?

While it’s promising to see work is being put into helping more people onto the property ladder, it’s difficult to ignore the potential pit falls of the 1% deposit scheme.

The risk of negative equity

With a turbulent economy, there’s always a possibility that house prices could fall. This usually happens at times where people can’t afford, or choose not, to move house because of market instability.

As the demand for houses goes down, so do the prices. When this happens, homeowners are at risk of their house entering negative equity. This is when the total value of their mortgage is higher than the value of the house.

For example, if an individual buys a home priced at £220,000 in 2024 with a 99% LTV mortgage, they then owe their lender £217,800. If by year two of their mortgage, their house is now only worth £209,000 because of external issues impacting the housing market, they’re likely to have fallen into negative equity. This can make selling or remortgaging the home very difficult.

An increase in house prices

On the other end of the spectrum, this new scheme could risk increasing house prices nationally. According to Centre for Crisis, the UK has 4.3 million ‘missing homes’ – houses that were never built.

This backlog of housing, both affordable and private, is a key reason for the nation’s housing crisis. There are simply not enough roofs to put over the growing population’s heads. Britain is struggling with housing supply and demand, and this means higher rents for those who cannot buy and increased housing prices and mortgage costs for those looking to buy.

By introducing the 99% mortgage, the issue is at risk of being exacerbated. More people on the property ladder means even less supply for a growing demand. It has been widely reported that to avoid a housing and mortgage crisis, the Government must make it a priority to fulfil the need for housing before, or alongside, this scheme if it were to come to fruition.

Affordability issues

While the 1% deposit mortgage scheme addresses first-time buyers’ challenges with saving enough of a deposit, it doesn’t address affordability assessment issues.

The larger deposit a buyer can put down when purchasing a home, the lower their monthly repayments will be. This in turn reduces the amount of money they need to earn to be approved by a lender.

For a £220,000 house with a 1% deposit and a 30-year term, as well as understanding that the rate for a 99% mortgage is likely to be around the 6% mark, buyers would need to earn an average salary of £49,877. If the same property was bought with a deposit of 10%, buyers would need a significantly lower average salary of £39,600.

The need for a much higher salary may negate the 1% deposit scheme’s aim to help people onto the property ladder faster, as they may need to wait longer to earn enough to be accepted for a mortgage.

If you want to know how much you could borrow for a mortgage, use our mortgage calculator today.

It’s unclear if this 1% deposit mortgage is anything more than a rumour, or if it will actually be implemented in the Conservative Budget on March 6th. If it does become an option available on the mortgage market, there are clear benefits to the scheme. However, buyers must also be aware of the hurdles that could be presented by choosing a 99% mortgage.

If you’re unsure about the 99% mortgage scheme, it’s vital to seek support from a trusted financial adviser. Our independent mortgage team will work with you to help you understand if it’s right for you. Talk to us today.