The government will reportedly unveil an initiative to encourage lenders to offer 99 per cent mortgages in the spring budget. If implemented, it will be the first time loans for buyers with just a 1 per cent deposit will have been widely available since 2007 — before the financial crisis.
Details are thin on the ground, but the scheme will probably mirror the existing mortgage guarantee scheme for 95 per cent mortgages, in which the government offers banks insurance against a fall in house prices. This means that, if a home is repossessed and sold for less than 95 per cent of its original price, the government makes up the shortfall to stop banks being out of pocket.
The first iteration of the 95 per cent scheme, which was introduced as Help to Buy for first-time buyers between 2013 and 2017, was genuinely needed. After the financial crisis, lenders were only willing to give a mortgage to buyers with at least a 10 per cent deposit. The scheme succeeded in bringing 90-95 per cent mortgages back onto the market, and the number issued rose from 10,000 in 2012 to 40,000 by 2014, with lenders taking up the option of government insurance on two thirds of them.
The guarantee was reintroduced in 2021, during the pandemic because fears of high unemployment led to concerns mortgage loans would dry up, causing house prices to fall. That scheme is still running, but there has been little need for it. As it turned out, the fall in house prices and rise in unemployment didn’t materialise, so banks have only bought the guarantee for 20 per cent of eligible loans. However, rather than deciding the need for the support has passed, the government is now apparently planning on repurposing the scheme to encourage riskier lending.
The idea of 99 per cent mortgages, as proposed now, is not completely without merit. They give some, whose only barrier to buying a home is low savings, the ability to buy. Indeed, it’s arguably fairer for those who earn enough to afford a big mortgage to be able to buy a home, rather than only those with a big deposit, most often gifted by or inherited from parents.
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However, neither is the scheme without risk. While the scheme insures lenders, it still does nothing to stop homeowners falling into negative equity, which means their home could easily be worth less than they owe the bank until house prices recover.
But while the scheme is, at best, being implemented at the wrong time, at worst, it misdiagnoses and aggravates the problem. This problem is that, ultimately, young adults struggle to buy their own home because house prices are too high.
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A quarter of a century ago, the average family spent a quarter of their income on mortgage payments, and could borrow enough to buy the average priced home fairly comfortably. But this has changed — first because of the boom in house prices in the 2000s, and then because of the slump in housebuilding after the financial crisis and the sale of existing homes to buy-to-let landlords, limiting supply.
The upshot is that the average house price is now well above what the same family could reasonably borrow and, today, buyers are not putting down smaller deposits, but ever-larger ones to bridge the yawning gap between the mortgage the bank will give them, and house prices.
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The average first-time buyer deposit is now more than £60,000 — equivalent to two years of the average take-home salary — compared with £8,000 (eight months) in the 1990s. As a result, the share of young adults aged 25-34 that own their own home has almost halved, from 51 per cent in 1989 to below 30 per cent. Put simply, the maths does not work for many people.
The reforms that ministers must implement to address our housing shortage are difficult at the best of times, let alone when there is an impending election and the government is trailing in the polls.
Bringing back 99 per cent mortgages not only fails to address the major problem of too little supply, but at the margin makes it worse by raising demand and pushing up prices further. Even those that benefit will be at risk of ending up underwater if house prices fall.
Andrew Wishart is a senior property economist at Capital Economics
