Banks reject plans for 99pc mortgages

Jeremy Hunt has cancelled plans for a scheme which would have allowed first-time home buyers to enter the housing market with a 1pc down payment, only days after it was revealed that the Treasury had considered the move.

Treasury insiders say the Chancellor has abandoned the taxpayer-backed plan ahead of next week’s Budget following a backlash by lenders who warned that the plans could lead to a surge in defaults from borrowers.

Banks warned that they will be forced to increase interest rates for 99pc loans, as they would have to put up more money to back the loan. Borrowers would also be at a higher risk.

According to the plan, first-time homebuyers would have been allowed to buy a house with a deposit less than £2,000. A portion of the mortgage loan was also guaranteed by the government.

Treasury insiders said, “It is off the table.” This was just one of 30 ideas that officials had. Since then, headroom has been drastically reduced. We need to refocus our Budget.”

An executive banking source said: “It’s just to grab attention.” The majority of first-time home buyers will not be able afford it.

Mike Regnier, Santander UK’s chief executive, stated in January, that mortgages with a deposit of only 1pc could increase risks for banks, as borrowers may have less incentive to make payments.

Mr Regnier stated: “The customer’s interest is to keep repayments at 95pc because of their economic interest.

As soon as the house price drops by 1pc to 99pc, the customer’s economic interest is gone and the rules change.

TSB said that a 5pc minimum deposit is an “important” form of protection. Last month, a spokesman stated: “Like many lenders, we have a maximum LTV of 95pc and the deposit is incredibly important for both banks and customers.”

Lucian Cook of Savills, the director of residential research, has warned that a mortgage at 99pc would make purchasing a house for a first-time buyer much more expensive.

According to an estate agent, a typical UK first-time-buyer property would cost £4,400 more per year if purchased with a standard loan.

A first-time buyer who uses the government’s scheme will pay £16,243 annually on their mortgage, which is 38pc higher than if they used a standard loan.

Cook explained that the difference was due to higher interest rates on larger debt amounts.

First-time home buyers in the UK typically borrow 77pc. A mortgage of 99pc would increase their debt by 28pc.

Mr Cook also estimated that the interest rate on a mortgage of 99pc could be 0.5 percentage points more than a standard loan.

The extra cost is even greater in London , where the high proportion of house prices to income means that first-time homebuyers are typically required to purchase their homes with a 69pc loan.

Mr Cook stated that a 99pc loan would cost a new buyer 53pc extra than if he or she had used a standard loan. It would cost them £868 extra per month and bring their annual mortgage bill above £30,000.

He continued: “In London, it would have seemed ridiculous. The average amount of money that a first-time buyer can borrow in London is already limited by their income. It would have struggled to gain any traction.”

Plans for 99pc mortgages involved a redesign of the Government’s Mortgage Guarantee Scheme 95pc, which was launched in 2021 to increase low-deposit lending after lenders pulled out these deals during pandemic.

The scheme’s popularity has been low. The scheme supported only 11,000 home purchase transactions in the year up to September 2023. This is equivalent to 1pc.

A HM Treasury spokesperson said that they were not in a position “to speculate on Budget measures”. The existing 95% loan-to-value mortgage scheme, which was introduced in April 2020, has enabled more than 39,000 households to purchase a home. Over 86% are first-time buyers.

The Autumn Statement extended the scheme for two more years in order to offer additional assistance for first-time buyers.