Chancellor Jeremy Hunt is planning to launch a 99% mortgage market scheme, as the Conservatives look to woo younger voters ahead of the general election.
The scheme would be reminiscent of the Help to Buy schemes, as the loans would have some government backing.
The scheme is likely to be in the Chancellor’s Budget on March 6.
Simon Gammon, managing partner at Knight Frank Finance, said: “The popularity of the scheme will depend on how the lenders opt to price these mortgages. If they are competitive, take up will be substantial, but getting rates competitive will require the government to underwrite quite a sizable proportion of the loans.
“Fuelling demand to this degree without a massive surge in housing supply will undoubtedly fuel house price inflation. There is also the very real prospect that any falls in house prices will leave many buyers in negative equity, with the taxpayer on the hook in the unfortunate circumstance that borrowers aren’t able to meet their payments.
“It’s quite a high risk strategy, and it illustrates just how few options the government has if it wants to help first time buyers in meaningful numbers in the short term.”
If the scheme goes through borrowers will have access to the highest LTV mortgages they’ve had since before the global financial crisis, when 100% LTV mortgages were common.
Arjan Verbeek, chief executive of Perenna, a lender, said: “While industry commentators have been very quick to dismiss this scheme, if done correctly, this has the potential to unlock the housing market. It is essential that the risks, like negative equity, associated with higher LTV mortgages, are mitigated, which can be achieved by combining the scheme with long-term fixed rate mortgages (LTFRM). The key is to remove market risk from borrowers, which traditional mortgage products can’t deliver.
“With an LTFRM, borrowers can also afford a larger loan and in some instances, up to six times their annual income. This is because the traditional mortgage products, and their ‘affordability’, are inherently linked and restricted to the lender’s much higher standard variable rate (SVR).
“However, there’s a clear need for regulation to be aligned and updated to reflect the current market. The Bank of England rightly introduced a loan-to-income cap to protect against reckless lending and excess leverage, but LTFRMs should be exempt because payments are fixed for term duration.
“The benefits to homeownership offset the risk of leverage on a long-term fixed rate too and the removal of the limit will incentivise larger lenders to offer more LTFRMs – ultimately benefiting the consumer with greater product choice, innovation, and giving a chance to step onto the housing ladder.”
