Will 1% Deposit Mortgages Help Struggling First-Time Buyers?

Will 1% Deposit Mortgages Help Struggling First-Time Buyers?
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25 January 2024 – The government may be reintroducing a radical housing solution dedicated to first-time buyers: 1% deposit mortgages.

Under Rishi Sunak’s leadership, there are talks of launching 1% deposit mortgages to help the so-called Generation Rent make homeownership a reality. 

First-time buyers to finally get onto property market

For many aspiring property owners, the lump sum payment for a deposit is one of the biggest deterrents in buying a home. This new initiative eliminates the financial barrier of homeownership due to sizable mortgage deposits.

Rightmove’s January 2024 data shows that the national average asking price is £359,748 for properties coming to market. Under the 1% deposit scheme, a prospective buyer only needs to pay around £3,597.

In other words, it’s an upgrade of the recently expired Help to Buy scheme. 

The 2021-2023 iteration of the equity loan scheme was exclusively reserved for first-time buyers who bought new build developments.

The government helped purchase properties with a 5% deposit when 95% mortgages were rare. It also emphasised enacting price caps based on the region buyers plan to secure property from. 

According to government statistics, over 387,195 properties were bought under the scheme. These equity loans amounted to £24.7 billion, which taxpayers entirely subsidised.

Aside from offering a much lower mortgage deposit requirement, current reports do not specify how this new scheme can help first-time buyers with payment affordability tests. But that could all change with an announcement during the March 6 Spring Budget.

Low deposits may cause more debt and higher house prices

As 1% deposit mortgages lower the barrier for homeownership, it’s a sorely needed opportunity for young buyers cornered into renting. 

However, concerns have been raised about its long-term effects on borrowers and the housing market. 

For one, economists warn that buyers may be saddled with unmanageable debt. Debt comparable to the type shouldered by buyers who took 100% mortgages during the 2008 market crash.

Short-term gains can definitely result in long-term losses. 

In other words, while it looks good on paper, a 99% mortgage will result in a higher mortgage loan and more substantial interest rates. This scenario may be a win for those who cannot save for a deposit and are paying higher rental fees than a mortgage payment. 

But from the perspective of those in areas with a high cost of living, such as London and Cambridge, this is simply not feasible. 

Another unintended effect of making mortgage deposits more attainable is that the demand vastly exceeds supply. It can drive up house prices, further locking out renters from homeownership.

The consensus is that 1% deposit mortgages can cause another housing bubble. In the end, borrowers are at an elevated risk of being stuck in negative equity when supply overcomes demand and prices fall. 

Prioritise supply over catering to young voters

The reaction to the news broken out by The Independent was mostly a uniform sentiment. Rishi Sunak and Jeremy Hunt are trying to appeal to young voters for the Conservative Party.

With all the potential influence 1% deposit mortgages can have on the already fluctuating property market, it’s no wonder that it was met with scepticism.

We experimented with 100% mortgages back in the early noughties and we all know how that worked out. This is pure desperation to stay in power. This Government is so desperate that they will latch onto any idea that wins votes despite the potential for massive negative ramifications.

Charles Breen, founder of Montgomery Financial

If the Tories are serious about addressing the UK’s housing crisis, they will have to turn to the root of the problem rather than band-aid solutions to secure re-election.

And that is implementing a sustainable policy to improve supply and protect the housing market’s stability. 

Our Opinion

We are definitely in an election year, if the government is more interested in good sounding headlines than actually helping first-time buyers. And of course, they are not looking at the roots of the problem, the lack of affordable housing stock.

The biggest concern with this new type of mortgage is that it will inflate prices, which is the last thing first-time buyers need. Any initiative like this will create demand, because young people are desperate to get onto the housing ladder.

And we know what happens when demand increases, prices do too. Higher prices mean higher borrowing costs and higher deposits, even if it’s only 1%.

And let’s not forget, mortgage rates are at a much higher level than three years ago. And a mortgage with a loan-to-value of 99% means higher rates. Which in turn means higher monthly payments.

Many first-time buyers won’t be able to afford these mortgage payments, so the scheme won’t be able to help them. And prices are on the up again.

But the government has shown time and again, they are unable or unwilling to address the lack of supply. They prefer to tinker around the edges in the hope it might make a difference. And in an election year, that’s all they are interested to do.


  • News Desk

    Our news desk team includes a qualified architect, a freelance journalist, and a fanatical property expert who has over 12 years experience in the industry.

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