Rishi Sunak's 99% mortgage idea could overheat UK housing market, say experts

Government officials, including Prime Minister Rishi Sunak and Chancellor Jeremy Hunt, are reportedly contemplating a "99% mortgages" scheme, raising concerns among industry experts about the possibility of fuelling a fresh house-price bubble (Author, date).

This proposed plan, set to be discussed before the spring budget on March 6, would require first-time buyers to contribute only a 1% deposit towards their initial home, surpassing the previous 5% deposit requirement of the expired Help to Buy scheme.

Torsten Bell, chief executive of the Resolution Foundation, said the low-deposit proposal would “permanently raise home ownership rates” – but warned that it would also mean the government “taking a massive chunk of house price risk”. “The last 15 years have taught us recessions are now VERY expensive for the state – causing huge increases in national debt,” the top economist posted on X – making clear the plan would “take even more risk onto the public sector balance sheet”. Mr Sunak’s party is struggling to win support among younger adults. Only 10 per cent of voters under the age of 50 intend to vote for the Tories, the latest YouGov poll has found.

If approved, the program would extend beyond the Help to Buy scheme, which ended in March 2023, and the recently extended mortgage guarantee scheme, designed to incentivize lenders to offer larger mortgages by covering a portion of their losses in case of defaults and repossessions.

The prospect of a 99% mortgage scheme has ignited debates, with experts warning about potential risks associated with pushing more buyers into the market. Peter Stamford, founder and lead adviser for Moor Mortgages, expressed concerns about the radical approach, stating, "It's a high-stakes gamble and could potentially fuel yet another house price bubble" (Author, date).

Other brokers, such as Richard Jennings from Richard Jennings Mortgage Services, cautioned that the scheme might expose borrowers to unmanageable debts similar to those during the 2008 financial crash.

Peter Stamford at The Mortgage Uni said the “sting in the tail” would be the higher interest rates that come with low deposits. “There is also a risk it could once again cause the property market to overheat, driving prices up further. It’s a high-stakes gamble and could potentially fuel yet another house price bubble,” the expert warned.

And Riz Malik, director at R3 Mortgages, said with house prices so high, affording monthly payments would remain a barrier for many young buyers. “However, for a government that looks set to be massacred at the general election, desperate times call for desperate measures,” he said.

Despite concerns, some Conservative MPs have shown support for the proposal. Robert Buckland, a former cabinet minister, welcomed the bold idea but suggested avoiding market overheating by ensuring mortgages are easily available for new homes built with modern construction methods (Author, date).

Shaun Bailey, an advocate for increased housebuilding, considered the idea positive, especially for young individuals struggling with hefty deposits.

Bright Blue – the centre-right think tank which has been pushing the government address the needs of young voters in “generation rent” – also welcomed the idea. “We need bold demand-side and supply-side measures to improve the affordability of home ownership,” said executive chair Ryan Shorthouse. “The size of the deposit is the biggest barrier for prospective first-time buyers. It is right that the government looks to guarantee mortgages to the extent that the upfront deposit which is required is significantly smaller.”

However, economists and housing experts warned that the scheme might create a massive risk for taxpayers and push up prices without addressing the housing shortage issue (Author, date). Torsten Bell, CEO of the Resolution Foundation, acknowledged the potential impact on home ownership rates but cautioned about the government taking a massive chunk of house price risk, particularly in times of economic uncertainty