Rishi Sunak and Jeremy Hunt have been considering plans to introduce ‘99% mortgages’ for first-time buyers which only require a 1% deposit from buyers.

Rishi is considering this move to try and reinvigorate the housing market and increase the numbers of first-time buyers especially in the face of higher interest rates which are making it prohibitively difficult to get a mortgage.

The plans have good intentions in that they are aiming to reduce one of the barriers to people buying a property which is saving up for a deposit that is significant enough to allow people to access mortgages at a bearable rate for households.

Coupled with the Lifetime ISA – which gives first-time buyers a 25% boost on their savings up to £4000 – this could seem like a plausible policy to try and boost home ownership (something that most can agree is a good thing) however it massively misunderstands the problems in the UK housing market and could actually make the situation worse.

The government has tried such schemes before when trying to rectify the problems in the housing market: most notably with the Help To Buy scheme in 2013 where the government offered equity loans to first time buyers with a 5% deposit with the aim of reducing their loan-to-value (LTV) ratio and enabling them to have a  cheaper mortgage.

They have also tried to increase home ownership by offering tenants of council properties the opportunity to buy their homes at a discounted rate through the Right to Buy scheme and although this was well received and led to many buying council properties it also severely decreased our stock of social housing to the point where we now have a startling shortage.

Both of these schemes (and the proposed 99% mortgages idea) had some logic in that they made it more affordable to buy a property but their rationale had a glaring omission – nobody thought to point out that making something cheaper can dramatically increase demand.

This isn’t inherently a bad thing but we live in a country with a chronic housing shortage – 8.5 million people do not have their housing needs met and Britain is said to have 4.3 million fewer homes than is appropriate for the population it doesn’t take a genius economist to work out what is going to happen next.

After the introduction of the Help To Buy scheme in 2013, house prices rose significantly to the extent that some prices had risen by more than the value of the subsidy meaning that the policy had actually made it even harder for people to get on the housing ladder and I think this is exactly what will happen if 99% mortgages are introduced.

A further problem with 99% mortgages is that they are designed for those who cannot afford a property today and then when they get this subsidised mortgage will their situation have improved? Of course not, and if we experience another profound economic shock and interest rates have to rise again will these mortgage payments be sustainable? Probably not meaning that with this policy the government have potential to create the next generation of mortgage prisoners.

So what is the answer? It is clear that the main problem facing the UK housing market is a severe lack of supply of new housing so the logical answer is to subsidise housebuilders (not the buyers) to build more houses but without close regulation and monitoring there is no guarantees that the additional housing stock we so desperately need will actually be built (especially if it’s not in the commercial interest of the housebuilders).

I don’t know what the answer to our housing crisis is but it’s certainly not 99% mortgages.

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