x
By using this website, you agree to our use of cookies to enhance your experience.

OTHER FEATURES

Why the 1% mortgage deposit scheme is unworkable

The government’s proposal to introduce a new one per cent deposit mortgage scheme to help young people onto the property ladder is unworkable in practice and could saddle a generation with risky levels of debt says Charlie Davidson, a residential property expert with London law firm Bishop & Sewell. 

A one per cent deposit mortgage would see prospective first-time-buyers contribute just one per cent of the value of the property as a deposit, meaning they need to repay 99 per cent of the property’s value through their mortgage payments.  

While it’s typical for lenders to require a 10 per cent deposit, and some mortgages with five per cent deposits are also available, the proposed strategy aims to remove the need for high deposits, a significant barrier to home ownership for many young people. 

Advertisement

However, Davidson says they could cause significant unintended consequences in the UK property market. 

He says: “Removing barriers to home ownership is a laudable aim and young people do need support to get onto the housing ladder but in practice a one per cent deposit policy could have a dire impact. 

“For one thing, it seems incredibly unwise to incentivise people to saddle themselves with such high levels of debt. It’s all very well taking on a 99 per cent loan-to-value mortgage if property prices always rise, but the reality is that many people could quickly face negative equity should property values drop, or simply to not rise in line with interest rates. Likewise, any interest rate hikes could see homeowners unable to keep up their mortgage repayments. 

“Bad debt can have a contagious impact on an economy, as we saw with the subprime mortgage crisis in the US, which was fuelled by lending on risky mortgages, and contributed to the 2007/8 global financial crisis. Policy makers need to be conscious that banks don’t always lend responsibly. 

“The policy could stimulate demand for properties as more people will be able to purchase a home, but does little to improve the supply side. In fact, with many housing developers reliant on contractual deposits as a source of funding to finish building-out developments, there is a risk that one per cent deposits will not provide sufficient capital to enable developers, especially the smaller players, to compete. 

“Furthermore, from a practical legal perspective, the conveyancing process envisages a contractual deposit of 10 per cent of the purchase price, which the buyer is obliged to pay to the seller at the point of exchange of contracts. This should not be confused with the ‘deposit’ which is the money buyers provide up front towards the total purchase price of the property (i.e. not being borrowed). 

“If the buyer then fails to ‘complete’ the contract after the completion date, the contractual deposit can be forfeited to the seller for breach of contract.  

“This is a standard requirement in conveyancing contracts, and it means that even if an individual wants to enter into a one per cent deposit mortgage, they will still need to hand over 10 per cent of the purchase price to the conveyancing solicitor to enable the exchange, unless a lower deposit figure is agreed. This itself can be difficult, as a lower contractual deposit would need to be agreed across the whole conveyancing chain. 

“Given that most young people will not be selling their own property, they will need to meet the deposit from their personal savings/resources, which puts them back to square one. 

“The proposal has clearly been floated as a potential vote-winner and it will be interesting to see whether any of the political parties make a commitment to one per cent deposit mortgages in their forthcoming manifestos, ahead of the General Election later this year, but the implications and possible impact of such a policy need to be thoroughly considered.” 

Want to comment on this story? If so...if any post is considered to victimise, harass, degrade or intimidate an individual or group of individuals on any basis, then the post may be deleted and the individual immediately banned from posting in future.

  • icon

    What we are talking about is sub prime with the taxpayer picking up the pieces again!

    icon

    Longer term the property value will increase and any negative equity will be cancelled out, so the taxpayer should not have to pay in the long run.

    The taxpayer, along with the landlord, currently picks up the tab for all unpaid rent, which I suspect will be much more than the value of defaults on schemes such as this, especially if these buyers have guarantors.

     
  • icon

    Absolute madness from the worst Government we have had in a long time, and that’s coming from a Conservative voter.

    icon

    I think it's worth a try.

    People striving to buy their own homes make better citizens than long term sofa surfing tenants subsidised by the taxpayer.

     
  • icon

    My interpretation is that everyone is quite happy with landlords risking handing over a property worth well into six figures in exchange for one month's rent and a tiny deposit which is then handed straight over to a third party organisation.

    However the money men are worried about risking 10% which with some changes to current contract terms, could be secured against the property to be purchased, with the borrower still ultimately responsible for it if things went wrong.

    A theoretical fall in the property's value puts the borrower in negative equity, but this will be temporary as property always rises over time.

    The same money men don't seem to worry about the negative equity on the loans for an overpriced car which loses value as soon as it's out the showroom.

    I suspect, given how low mortgage rates are even now, all of this is just too much trouble for them to be bothered with, which is a shame as anything that increases the opportunity to buy and thus the imperative on younger people to work harder should be encouraged.

  • icon

    1% mortgage deposits for young wannabe homeowners will increase property values and payment defaults. Sensibly, it is wise to look at the cheapest mid to long-term option: mortgage payment or rent.

  • icon

    Increased debt, not a good idea

    icon

    I agree, but this faux-Conservative government think that homeowners will vote for them. They have a shock coming.

     
    icon

    Andrew

    I think mortgage debt is generally good debt as property tends to appreciate relatively quickly and the borrower keeps all the gain in return for paying the interest.

    On the other hand, debt to buy fancy cars,
    mobile phones or holidays isbad debt and any aspiring home owner would be crazy to take these on.

    Some 50 odd years ago I wasted 2 years building up the necessary 10% deposit, whilst paying rent and watching house prices continue to rise and being powerless to do anything about it.

    I was paying around £800 per annum in rent plus Domestic Rates, Energy bills etc. whilst earning around £2000 before 33% income tax and my wife around £1500. Despite saving her entire after tax salary, it took over 18 months to get a mortgage in principle of around £9500 and nearly 2 years before we actually bought our first brand new house, which went up £500 to £11500 while we were waiting on it being completed and getting to the front of the mortgage queue, as they weren't instantly available then, unlike now.

    Had a 1% deposit deal been available, we could have bought the same type of house over 18 months earlier for around £9500 and saved around £1500 in down the drain rent payments.

    I have been lucky enough to let my 3 kids avoid waiting on building up decent deposits and I think any scheme to help less fortunate aspiring house owners to do the same should be supported and the cries of woe from the money men forced to change outdated rules should be ignored.

     
  • icon

    Why the obsession with trying to coerce people to buy houses they can't realistically afford?

    Affordability multiples dictate a person can afford to rent a vastly superior property to one they would clear mortgage lending criteria on.

    The standard rental affordability multiple is annual salary must be at least 30 times monthly rent. So a couple on minimum wage (£10.42 an hour) each working 37.5 hours a week would clear affordability for £1354 rent a month.
    At 5 times salary for mortgage purposes that would allow them to borrow £203K.

    Locally £1354 a month will get a modern 3 bedroom house with a garage and parking in a nice area. Those houses sell for around £300K.

    £203K would buy a 2 bedroom flat in a decent area with annual service charges of around £1500. Or an ex Council 3 bedroom maisonette.

    The other downside with buying something that really pushes finances is if circumstances change. Add a baby and the desire to cut back to part time hours due to the cost of childcare or the sheer exhaustion of trying to do everything and for homeowners things get very tight. Tenants have access to UC so have far more choices regarding working hours.

    icon

    Jo

    Surely one solution is to work 50 hours instead of 37.5, giving 1/3 more extra income (without any overtime uplift) without any additional outgoings?

    During our 4 years in our first home, my wife and I each did around 20 hours of tuition every week for about 40 weeks each year in addition to holding down responsible day jobs which demanded substantially more than 37.5 hours each week.

    This allowed us to sell our relatively modest 3 bed Wimpey for £17500, a profit of £6000 over 4 years and buy a large house in an affluent area for £35,000.

    Nearly 46 years later, we're still in it, although it's now far too big for our needs - but high moving costs are dissuaded us from downsizing until we need the additional support available in a retirement flat or care home. Today's Daily Telegraph says people in affluent areas live longer so we're going to hold on to our longer life entitlement for as long as possible. It also says that 1.29 million people over 65 live in 4 bedroom houses and 68.8% of England's homes are under occupied.

    Providing incentives to older home owners to downsize would make more modest homes available for first time buyers.

    Instead high stamp duties make people build unsuitable extensions instead of moving and builders build 5 bedroom 5 bathroom boxes miles from anywhere to compensate for the lack of larger properties becoming available through downsizing.

    The Government has made crazy decisions in terms of disincentivising landlords and downsizers, but promoting greater home ownership with 1% deposits isn't one of these crazy plans.

     
    icon

    Robert - you're quite right. People COULD work more hours. I certainly used to work 84 hours a week and do up houses in my spare time. I didn't get to see much of my children though.
    Some people prioritise spending time with their families. I was never very good at that bit.

    I did the downsizing thing about 12 years ago when the Council introduced an Article 4 area. We lived very close to a university in a 5 bedroom bungalow and knew if we didn't sell when it still had the right to let it would be virtually impossible to sell. So we downsized into a modern 4 bedroom detached house with my husband's dream garage. It's a 5 minute level walk to a railway station and Tesco. Straight staircase for a stair lift should we need one, etc.
    We looked at dozens of properties to downsize into and anything smaller just didn't have the non-negotiable stuff like a utility room, study or good parking.

    I am firmly of the opinion that building desirable properties for people to downsize into would go a long way to resolving the housing situation. Freeing up well established family size housing close to existing schools has got to be better than building further and further from existing amenities. But that housing has to be attractive for older people. It not the same as FTBs are willing to buy. A poky little bungalow by the sea that previous generations of pensioners aspired to isn't good enough to get us out of our family sized houses. I'm sure a great many older people would love to lose a couple of bedrooms and a big chunk of their garden but they don't want to lose the rest of what goes with a family size house.

     
    icon

    Jo

    I totally agree with you!

    We're also "fortunate" enough to have a very nice seaside holiday home with equally "fortunate " neighbours that we hardly ever saw when we were all working long and hard to become "fortunate" before we started to "retire", which probably means only working about 30 hours a week now.

    We had originally intended to sell our main home (CGT free) and move there full-time time on retiring but it's too far from hospitals, cities, our own working kids and grandkids - so we're not selling up until we need a retirement flat or care home.

    If we sold the holiday home, or even gave it to our kids, we would have a huge CGT bill, so that's not happening either.

    Thus the current taxation system is causing two septagenareans to rattle around in two homes with some 14 rooms including public rooms whereas a couple of 2 bed bungalows would meet our own (but not extended family) needs. Instead of providing any tax incentives to free up much needed larger homes, the SNP are doubling our Council Tax from April.

    If we could put up with the hassle we would replicate what we have done elsewhere and turn our own second home into a full time holiday rental, probably completely avoiding both Council Tax and Small business rates, but we've got enough hassle with what is already let out either short or long term.

     
  • Bob wellamd

    Until I am blue in the face, here is the solution.
    I sell to my tenants at market price
    50% of my CGT goes to the government, 50% toward the deposit. The tenant repays the government over 10 years at zero interest.

    icon

    Bob

    I would propose 20% CGT paid to the Government, 30% as a price reduction to the buying tenant, repayable to the Government over 10 years and 50% reduction in CGT to you as incentive and compensation for giving up future years' rental income, only repayable if you buy any further properties to rent out.

     
  • icon

    They are so desperate 😬😬 they will try anything to get a few votes 🫣 tragic

  • icon

    Home ownership is fine for these people until something goes wrong with the property, boiler packs up, roof leaks, then what?

    icon

    Andrew

    There are 168 hours in every week The first 40 hours pay for the day to day essentials and a further 10 or so can build up the funds needed to deal these problems.

    As landlords, we set our rents to ensure we can deal with these issues and our tenants pay for them being dealt with whether they need dealt with or not, just like an insurance policy on which we hope to make the insurer's profit for taking the insurer's risk.

    Young aspiring home buyers will hopefully have sufficient sense and work ethic to deal with both the predictable and the unexpected.

     
    icon

    True Robert but most only want to work the bare minimum, you and I are of a different generation, when an employee if there was overtime available I took it, most run a mile from any overtime now

     
    icon

    Andrew

    I know you are right as far as lifetime renters and public sector employees (not workers) are concerned but hopefully most aspiring home owners will have or develop a better work ethic?

    I have complained a lot about how taxation and government policy is counter productive. For example, any doctor working extra hours to help bring down waiting lists will pay anything between 45 and 62% of the extra earnings in income tax.

    If I were Chancellor, I would levy income tax on the basis as if every full time worker did 50 hours a week but then charge zero tax on hours worked over 37.5 hours so everyone had a real incentive to work at least 50 hours a week and was penalised for not doing so.

    Before parents start screaming about child care cost, I would also keep kids at school for 50 hours a week to teach them a proper work ethic.

     
    icon

    Robert - the problem with working more hours is the huge tax take.
    People working in industries such as construction or road haulage are now looking at losing their Child Benefit if they get a payrise or do any overtime.
    One of my sons is facing an 87% tax bill on his recent payrise. His employer is constantly asking him to do overtime but what's the point if he only keeps 13% of the extra pay? Especially if he has to pay an extra days travel costs to get to work.
    He was earning around £50K a year. He will be on just over £55K. So on some of it he will be paying 40% tax plus 2% NI and he will lose some of his CB. He has 5 children so will lose £455 for every £1000 he earns over £50K. That's a total of £875 out of every £1000 that the government will take off him.
    Because he's a homeowner he isn't entitled to any UC. If he was a tenant he would get £610 a month UC. He also wouldn't have to pay thousands a year to maintain or insure a house as that's all included in rent.
    This government has absolutely screwed young, aspirational families with their obscene tax policies. Our generation didn't have such blatantly vicious treatment or the same barriers to financial security.

     
    icon

    Jo

    I agree. I would put up the current income tax rate to 30% for working up to 30 hours a week with zero tax on additional hours worked.

    That would give an incentive to the best workers without employers having to pay higher overtime rates.

    I think the Child Benefit anomaly will be fixed in the next budget and be based on household income over £100k.

     
  • Sarah Fox-Moore

    Keep jacking those house prices up! Fine by me. But for the young and debt burdened it is another unmitigated disaster! Talk about rinse and repeat! 🤦‍♀️

  • icon

    High debt is not a problem if you can pay the interest and you are not forced to move. If your circumstances change switch to interest only payments or extend the loan term. If it takes most of a lifetime to pay off the mortgage that means free accommodation in your later years and a nice inheritance for your children which could pay off their mortgages.

    icon

    Not moving is really the crux of it. How many FTBs can afford to buy their "forever" home?
    Last time I moved (downsized) the combined cost of SDLT, estate agents fees, solicitors and removal company was £25K.

    One of my former tenants is hoping to move soon but needs to find £40K to make it happen. It's certainly put one of his former housemates off the idea of buying any time soon.

     
    icon

    Jo - If your income grew then you could upsize. My niece, who just got married has just bought her first home with a deposit from her mum. It is a 4 bedroom house with a massive garden. She bought it at a knockdown price as the owner had been trying to sell for around a year without any viewings let alone any offers. It is going to be a major project for her. There is no kitchen, no heating, the electrics will have to be completely redone. She wants to move the location of the kitchen to the other side of the house and install a downstairs toilet. I hate to think how much this is going to cost her, even though she intends to do a lot of the work herself. When it is habitable she will be renting two rooms to relatives to help with the costs. It could be her forever home.

     
    icon

    John - what your niece has done is fine for anyone who has reasonable practical skills, plenty of spare time and who doesn't mind living in a building site. I imagine that's exactly what several of us have done but most of us are property people. It doesn't mean it is what most young families would choose to do or would have the skills or time to do.

    Upsizing or downsizing both cost huge amounts in fees. It's only FTBs that don't have many costs mainly because they aren't selling a house and get much cheaper SDLT. Everyone else is paying a lot of fees. It's those fees that are the real dead money in the housing market.

     
    icon

    Jo

    That's exactly why 68.8% of homes in England are under occupied and 1.29 million home owners over 65 still have homes of 4 bedrooms or more!

    Punitive SDLT rates were brought in by Gordon Brown along with making everyone else's final salary pension scheme unaffordable- only Public Sector now has this as a Ponzi scheme.


    Unfortunately most voters can't remember the shambles of the last Labour Governments and we're about to suffer them again, but with even less financial acumen and more bitterness and envy of those who have worked hard to become "fortunate"!

     
    icon

    John.good on your niece for doing so, that's how I started even with a young family, it's well worth it in the end

     
  • icon

    Another mis selling scandal in the making

  • icon

    I think it takes the property cycle too long to recover.
    I remember some years back a couple were splitting up.
    The house would have sold easily for £300k but they couldn’t agree on anything and the rangling went on. In the mean time the price shot up at which similar properties sold in the road reached £500k but still didn’t settle then came 2008 low & behold they ended up selling it for £300k.
    No good saying long term live Horse and you’ll get grass.

  • icon

    I didn’t have much time yesterday or read everything.
    The article about 1% Deposits is ridiculous its just roping people-in to unaffordable debt, making extra millions for Developers and Financial Institutions if they can’t even afford to save a Deposit they haven’t a hope of meeting repayments.
    Also Bobs idea about Capital Gains tax is a non starter more than Bob would blue in the face.
    Martin Lewis said only 4% of people pays c/gains the others are mitigated by malarkey £1m rules. Capital Gains should be scrapped in the Budget its so unfair its tax on inflation and the tax has already been paid.
    So if ML is right 4% are covering for 96% of C/gains payers, don’t think that’s going to solve the housing crisis, scrap it now and let us out and free up the Market.

    icon

    Probably the best we can hope for in the budget is that there is a change in plan to reduce the capital gains tax allowance to only £3000 from April 2024.

    Scrapping capital gains tax (very unlikely) would, of course, give us a window to sell everything before the next general election.

    The main concern for landlords may be that Labour will increase capital gains tax and, at the same time, introduce even more stringent rental reform legislaiton.

    As for inheritance tax, it seems the Conservatives would like to scrap this, but that is unlikely in the budget. They could increase the tax free inheritance tax allowance perhaps.

     
  • icon

    Personally I don't think a 1% is a problem. If you have the income then you will be able to afford it. Depending on interest rates it does not matter if you have a 10% deposit or 1% you will either afford it or not. Bank's will set rigid rules as they will want to ensure that they can recover their money if it goes wrong, therefore in reality this product will only be suitable for the very few.
    Overall the Government need to think about housing strategy because currently it is madness as explained in the comments. I would like to point out though compare us to France and our stamp duty is cheap, very cheap. This approach by the French also then keeps the property market stable. It is also helped that the mortgage rate is set fo the life of the mortgage and not for the benefit of the lender.

  • icon

    Ok well it was always my idea to have as much Deposit as I could to make repayment as manageable as possible, increasing debt is increasing re-payments and or probably going from 25 year loans to 35 year in which case in my view is not having more like a life sentence.
    There is not the shortage they would have us believe although the Government has made a good job of making people homeless by deliberate rules , law, regulation and Licensing getting rid of private landlords.
    The Corporate landlord, Institutions, large Companies many new comers never involved in Residential before,
    Pension funds now a massive move in to the industry etc.
    So we are being systematically replaced by the unnecessary RRB to make sure. Hello here comes Permitted Development Rights the icing on the Cake. Vacant Commercial Buildings, Office’s, Shops, Banks, Pubs etc can now be converted to Residential without the usual Planning Permission or waiting around just tick a few boxes the Council’s can’t refuse you, bang in your application with drawings and start straight away. Do you still think we are not being replaced.

  • icon

    Can’t see them reducing c/gains tax when they have 3 lower rates 10, 18 & 20% already.
    The more tax you pay is more tax you pay its like a Penalty for being so good to be paying too much tax you get Penalised instead of a discount.
    The less tax people pay they more they are rewarded and the if they pay no tax the reward are massive, just go lobbying and shout from the roof tops so to speak that the highest rate tax payers should be paying more. Anyway 28% is high why don’t we all pay same amount ? Over the decades when purchasing we all did pay the same SDLT whether high or low income taxpayers. I can’t see why the difference treatment when Selling.

    icon

    Previous suggestions have included aligning capital gains tax rates with income tax (currently 20%, 40% and 45%) and abolishing or adjusting business asset disposal relief.

    That is not likely to happen in the March 2024 budget but could occur under Labour perhaps.

    It may be that if we are thinking of selling that it would be wise to do so sooner, rather than later, since capital gains tax may become even more punitive.

     
  • icon

    I can’t see how it could be more punitive than it is now for the older generation (68%)the back bone of industry that build it when the Digital generation were making a horse out of the dog now making a mess with Computers. So give it away seven years before you die that was scam and never possible breaking up family units in front of your eyes. Alternative transfer now pay 28% c/gains then if you die your Est pays 40% inheritance tax but the 28% is forgotten about about that property is brought back into your Est for inheritance tax purposes and the lot is taxed again at 40%, some one I hope will clarify this for me.

  • icon

    Just 1% down does seem risky with any rate hikes to any mortgage.
    If this goes ahead, they should make it mandatory to have a 10 year fixed Mortgage which can also transfer to another property down the line.
    This will mean any nasty % hikes don't make the house unaffordable.
    If not then it is a terrible idea as too many young people will stretch themselves financially and just minor % increases will see mortgage defaults.

    icon

    exactly right Ray we can see just that happening

     
icon

Please login to comment

MovePal MovePal MovePal