Opinion: Government would be missing the point with a 1% deposit mortgage scheme

As reports suggest the Government is looking at pushing lenders into offering 1% deposit mortgages, here's why such a move would be a mistake.

The Government is reportedly looking at a new scheme designed to boost the prospects of would-be homebuyers.

This weekend the newspapers have been full of reports on the Government’s latest mortgage brainwave, an extension to the mortgage guarantee scheme.

The scheme was launched back in 2021, with the idea of encouraging mortgage lenders to offer more products to borrowers who only have a small deposit.

Lenders are obviously less keen on doing so, due to the greater levels of risk involved ‒ it only takes a couple of years of modest house price falls and you could find yourself in negative equity.

The guarantee scheme is designed to lessen those risks, with the Government essentially promising to compensate the lender in the event that things go wrong, on the top end of the mortgage.

In effect, both the Government and the lender share the risk of losing money if the borrower ends up being repossessed, making it less daunting for lenders to offer mortgages at up to 95% loan-to-value.

The reason for the scheme initially was the response of lenders to the pandemic.

In the midst of the Covid crisis, the housing market actually performed really strongly, helped no doubt by the introduction of the Stamp Duty holiday.

Lenders were active in the market, but very much focusing on buyers with decent deposits ‒ there were not as many options for those who only had 5-10% saved.

The guarantee helped in addressing that shortfall and was sufficiently successful that it has been repeatedly extended, from its initial one-year term to now run until June 2025.

Expanding the guarantee

The fact that it has helped push lenders into being a little more generous towards those with small deposits has clearly caught the eye within the Government, with the idea that it could be expanded in a different way.

Over the weekend, the newspaper reports have suggested that Jeremy Hunt, the Chancellor of the Exchequer, is looking to adapt the scheme so that it applies to lenders offering deals all the way up to 99% loan-to-value.

In other words, the Government is considering underwriting the risks associated with lending to prospective buyers who only have a 1% deposit.

The announcement would reportedly be made during the upcoming Budget, with the clear intention of boosting the Conservative Party’s prospects in this year’s General Election.

Who would benefit?

There are certain people who would obviously find this an exciting move in the upcoming Budget.

There are plenty of hopeful buyers who face an uphill battle to get a home; while house prices have dropped from their peak, they remain prohibitively expensive to many, and so saving a sizeable deposit is a tough task.

This task has only been made more difficult by the cost of living crisis, with inflation driving up our outgoings.

If your bills have jumped by 30%, good luck finding any spare cash at the end of the month to devote towards your deposit saving.

It will likely be welcomed by vendors too.

The higher mortgage rates over the last year have dented the number of people actively looking for homes, but this scheme expansion should boost homehunters. 

That higher demand not only improves your chances of finding a buyer, but of driving up the price too.

Missing the point… again

However, the idea that 99% mortgages are somehow a cure for the ills of the housing market is wide of the mark.

As always, the focus seems to be on ways to artificially prop up demand, to get more people actively looking for homes. And all that does is push up house prices higher.

The whole reason that so many buyers might be tempted by a mortgage that only needs a 1% deposit is because homes are so expensive already that saving a 10% deposit or more is beyond them. 

Meanwhile, the homeowners see the value of their property increase once more, something that is always likely to appeal to a certain subset of voters in an election year.

The problems our housing system faces is not a secret. We don’t have enough homes, and we aren’t building more of them quickly enough. 

The trouble is that addressing this situation takes time, and the results won’t be seen for some years to come.

Any Government that is obsessed with short-term results will always ignore the right long-term call, for the sake of an eye-catching short-term boost.

The fact that the post of Housing Secretary gets passed around every reshuffle is yet more evidence of how little seriousness there is around the issue. 

If a 1% deposit mortgage is the answer, then you’re asking the wrong questions.