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31 January 2024

Why a 99 per cent mortgage means a high proportion of trouble

Buyers who take up the offer may well find themselves stuck with higher repayments – and unable to switch to other mortgages – for years to come.

By Will Dunn

As someone with very poor impulse control when it comes to snacks, I find government-mandated HFSS (high in fat, salt and sugar) warnings to be counterproductive. I’m rationally aware that eating four Tunnock’s teacakes, one after the other, will have consequences. But my brain has evolved to seek the teacakes’ once-precious resources, and a reminder of how much energy they contain is effectively an advert as far as my hypothalamus is concerned.

The same may be true of the prospective first-time buyers who were warned, in recent days, that the Treasury’s plan for a programme of “government-backed” 99 per cent mortgages will “overheat” the housing market and further inflate Britain’s house-price bubble.

To a renter with a small sum scraped together, this talk of heat and bubbles probably sounds rather nice, like a warm bath. Aside from the obvious benefits of owning your own home, the bubble makes it lucrative: Hamptons estate agents has reported that the average “gross profit” on selling a house in the UK last year was £102,650. It is completely understandable if first-time buyers view the housing market as I view a grab bag of sizzling-steak-flavour ridge-cut crisps: to be accessed as soon as possible, and by any means. 

Sadly, the profit from a rising market isn’t real because, unlike other assets, your house isn’t something you can cash in to pay for a holiday (unless it’s a permanent camping trip). Selling an overpriced house means buying an even more expensive house somewhere else. And a 99 per cent mortgage, even one that is “government-backed”, is a questionable offer.

It’s important to realise that it’s not you that the government is backing, but your bank. Every mortgage offer is priced against the possibility that the bank might need to kick you out of your home and sell it to pay off the loan. The smaller the deposit, the higher the risk that the bank itself will lose money doing that, and the less inclined it is to lend you the money.

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This reluctance to lend has been a regular danger to the giant residential Ponzi scheme the Conservatives have been running since the 1980 Housing Act, a scheme that depends on making housing ever more expensive, but bringing an ever greater flow of new buyers into the market, and persuading voters that this is a good thing.

In 2021 Rishi Sunak’s contribution to this, as chancellor, was to persuade banks to lend to people with just a 5 per cent deposit. To do so, he introduced a new policy in which the government insures your bank against the losses it might make from kicking you out of your home and selling it. The new 99 per cent mortgage policy sounds as if it will be an extension of this, designed to give the housing market a final pump before the election. 

But the Treasury charges banks for this insurance, and you can probably guess who picks up the bill at the end. The difference between a 95 per cent mortgage and a 90 per cent mortgage is hundreds of pounds per month in higher repayments. Buyers will also need to find another 99 per cent product after a few years, and if there aren’t many on offer they may be stuck with high rates for a long time.

In fact, a new housing bubble is about the only thing that would allow a 99 per cent mortgage to make financial sense, and one seems unlikely: by last autumn, real-terms prices were down more than 13 per cent. If you’re a young adult with a tolerable rental situation and a few grand in the bank, it seems very unlikely that any house you could buy with a 99 per cent mortgage would appreciate at the same rate as a Lifetime ISA, which will (if you pay in the maximum £4,000 per year) net you an annual £1,000 government bonus plus tax-free interest (currently around 3.5 per cent on the better deals) on the whole balance. When you do come to buy, having a 10 per cent deposit will unlock a wider range of deals at much better rates. Unlike Jeremy Hunt, you have time on your side.  

[See also: Improve your finances with a New Year cash diet]

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This article appears in the 31 Jan 2024 issue of the New Statesman, The Rotten State