Brokers have warned that the government could push up house prices even further if it guarantees mortgages for first-time buyers with deposits of just one per cent.
Rishi Sunak and Chancellor Jeremy Hunt are reportedly considering the idea as part of the Spring Budget on 6 March, aiming to win over young voters by helping them get on the property ladder.
Lenders typically ask for deposits of at least 10 per cent, which has posed a major challenge to many first-time buyers at a time when house prices are elevated.
However, some brokers have warned that 99 per cent loan-to-value mortgages could increase demand for housing and therefore raise prices, resulting in negative equity – when a property becomes less valuable than the remainder of the mortgage.
“It’s a high-stakes gamble and could potentially fuel yet another house price bubble,” Peter Stamford, of the The Mortgage Uni, told Newspage.
Charles Breen, founder of Montgomery Financial, added: “Rishi Sunak is clearly desperate for votes from youngsters struggling to get on the property ladder, as this kind of scheme could be a real vote winner.
“But short-term gain could result in long-term pain if borrowers slip into negative equity and at this loan to value there is definitely a chance of that.”
Although mortgage rates have plummeted this year as lenders compete for business in a market shrunk by economic turmoil, home loans with lower deposits usually have higher rates as they are seen as riskier to the lender.
The Independent reported that banks are wary of one per cent deposits due to a higher risk of defaults and repossessions, which could make the government underwrite much of the mortgage.
“To introduce one per cent deposit mortgages, the government will either have to fund or severely guarantee lenders for the additional risk, especially in the current economic climate,” said Stephen Perkins, managing director at Yellow Brick Mortgages.
“Whilst this could help remove one of the largest barriers to home-ownership and the need for family support, borrowers will still need to be able to afford and obtain a 99 per cent mortgage, which based on the huge disparity between house prices and incomes, means such a scheme would in fact only benefit a small minority.”
High interest rates and the cost-of-living crisis have dampened mortgage activity in the last 12 months, while increasing numbers of homeowners are falling behind on their payments.
Banking trade body UK Finance forecasted last month that the number of mortgages in arrears of at least 2.5 per cent would rise 22 per cent to 128,800 in 2024 after surging 30 per cent last year.