For many young Britons hoping to buy a home the biggest barrier in the way remains the lump sum needed for a deposit.
The struggle has become harder over the decades as soaring house prices have outstripped pay and robbed many on decent salaries the chance to get onto the property ladder.
The Independent has revealed that Rishi Sunak’s government is considering a bold plan to help “generation rent” by creating 99 per cent mortgages.
Instead of having to save tens of thousands, 1 per cent deposits could make the home ownership dream a reality with just a few thousand pounds.
So, could it work or will it prove too risky for many banks?
How can the government create a 1% deposit scheme?
The idea of encouraging 99 per cent loan to value (LTV) mortgages – with deposits of just 1 per cent required up front – is being seriously considered at the Treasury as part of discussions for chancellor Jeremy Hunt’s March Budget announcement.
Jeremy Hunt and Rishi Sunak hoping to give young people a reason to vote Tory
The Conservative Party is in terrible trouble with young voters. Only 10 per cent of voters under the age of 50 intend to vote Tory, the most recent YouGov poll found. Thus, Mr Hunt’s team at the Treasury is exploring ideas to boost the fortunes of first-time buyers.
Lenders typically require 10 per cent for the deposit but if the government guarantees to underwrite some of the larger, riskier loans offered with a deposit of just 1 per cent, it could open up home ownership to a much larger group of people.
Ministers have some recent templates to work with. The Help to Buy scheme, which ran between 2013 and 2023, saw the government offer 20 per cent equity loans and back 5 per cent deposits to boost homeownership at new-build developments.
And although much smaller in scale, the government’s “mortgage guarantee scheme” – set to run until 2025 – is also aimed at boosting the number of 5 per cent deposit deals available with lenders.
The government backs a portion of any mortgage offered under the low-deposit scheme, so it is willing to compensate the bank or building society if a home has to be repossessed.
House prices have long been unaffordable for great swathes of young people
Would it really mean buying a house for just a few thousand pounds?
Someone looking to buy a house at the national UK average of £290,000 would pay just £2,900 under the proposed 1 per cent deposit scheme.
But it would not magically secure young Britons’ financial future. Low-deposit mortgages typically have higher interest rates than those with larger deposits because of the greater risk for the lender.
And while 99 per cent mortgages would address the issue of finding money for a deposit, it doesn’t address the issue of passing an affordability test. House prices are still high, as are interest rates, so the monthly costs will remain daunting for many.
But getting more young adults started on a mortgage earlier would allow them to pay off the loan over a longer period, and could increase the prevalance of 35-year repayment plans to keep monthly costs down.
Will lenders back the plan?
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 means borrowers have less capital invested in the building. So there is less incentive to stay in the property if prices fall, because the borrower would only be losing a 1 per cent equity stake.
Could it affect house prices?
Housing experts are already warning that the radical proposal for 1 per cent deposits could “backfire” by pushing up prices in a potentially damaging way.
Making it much easier to buy would certainly provide a sugar-rush high in the market – but fuelling demand for the very limited supply of homes available could then create a price spike that would make it harder for the next wave of young people to afford the monthly costs.
The Home Builders Federation have welcomed the idea of a government-backed scheme that promotes new developments, arguing that the Help to Buy scheme boosted Britain’s sluggish construction rates.
Mr Hunt is believed to have concerns about moves to boost demand in the housing market if there are not equal measures to boost supply.
It remains to be seen if the chancellor feels the government’s policies to create more new homes are strong enough to push the button on a radical new mortgage support scheme.
