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The main obstacle for numerous young Britons looking to purchase a house is the large amount of money required for a down payment.
The challenge has intensified in recent years as house prices have risen faster than wages, making it difficult for those with good incomes to afford a home.
The Independent reported that the government, led by Rishi Sunak, is contemplating a daring proposal to assist “generation rent” through the introduction of 99 per cent mortgages.
By only needing to save a few thousand pounds, a 1% deposit could turn homeownership into a feasible goal instead of having to save tens of thousands.
Will this be feasible, or will it be too risky for most banks?
What methods can the government use to establish a 1% deposit program?
The concept of promoting 99% LTV mortgages, where only a 1% deposit is needed, is currently being discussed at the Treasury for inclusion in Chancellor Jeremy Hunt’s March Budget announcement.
Jeremy Hunt and Rishi Sunak are aiming to incentivize young voters to support the Conservative party.
According to a recent YouGov poll, the Conservative Party is facing challenges with young voters, as only 10% of those under 50 plan to vote for them. As a result, Mr Hunt and his team at the Treasury are looking into potential solutions to improve the situation for first-time home buyers.
Lenders usually ask for a 10% deposit, but if the government promises to back some of the higher-risk loans with only a 1% deposit, it could make home ownership accessible to a broader range of individuals.
Ministers have some recent templates to work with. The Help to Buy scheme, which ran between 2013 and 2023, saw the government offer 20 per cent equity loans and back 5 per cent deposits to boost homeownership at new-build developments.
The government’s “mortgage guarantee scheme” is designed to increase the availability of 5% deposit deals with lenders. It will be in effect until 2025, but on a smaller scale.
The government supports a percentage of the mortgage amount provided through the low-deposit program. This means that if a house needs to be taken back, the government is prepared to reimburse the bank or building society.
For a large portion of young individuals, the cost of purchasing a house has been consistently out of reach.
Could one really purchase a house for only a few thousand pounds?
An individual interested in purchasing a home at the UK’s national average price of £290,000 would only need to put down £2,900 under the suggested 1% deposit program.
However, this would not automatically guarantee the financial stability of young British individuals. Mortgages with low deposits often come with higher interest rates compared to those with larger deposits, due to the increased risk for the lender.
Although obtaining a 99% mortgage would solve the problem of having enough money for a deposit, it does not solve the problem of meeting an affordability assessment. Housing prices and interest rates are still elevated, making the monthly expenses intimidating for numerous individuals.
Encouraging young adults to secure a mortgage at an earlier age would afford them the opportunity to spread out loan payments over a longer period of time. This may result in a higher likelihood of utilizing 35-year repayment plans to keep monthly expenses manageable.
Are the lenders in support of the proposed plan?
Lenders may be cautious, despite the target audience being highly credit-worthy young buyers. The lower the deposit amount, the higher the level of risk.
The government might propose to guarantee a portion of the loan, but banks and building societies may seek extra financial reserves to back 99 percent mortgages.
From the perspective of a lender, low deposits indicate that borrowers have a smaller financial stake in the property. This reduces the motivation to remain in the property if its value decreases, as the borrower would only lose a small portion of their equity (1%).
Is it possible that it could impact the cost of homes?
Experts in the housing industry are cautioning against the proposed idea of utilizing 1% deposits, as it may have a negative impact by driving prices up in a harmful manner.
Simplifying the purchasing process could lead to a surge in the market, but this could also drive up prices due to the scarcity of available homes, making it more challenging for future generations to afford the monthly expenses.
The Home Builders Federation has expressed support for a government-sponsored initiative that encourages new housing projects. They argue that the Help to Buy program has helped to improve Britain’s slow construction rates.
It is rumored that Mr. Hunt is worried about efforts to increase demand in the housing market without also taking steps to increase supply.
It is uncertain if the chancellor believes the government’s efforts to increase the number of new homes are sufficient to implement a groundbreaking mortgage assistance program.
Source: independent.co.uk
