From Rumour to Reality: Exploring the 1% Deposit Mortgage Guarantee

The government's potential consideration of a 1% deposit mortgage guarantee scheme for First Time Buyers has stirred quite the buzz since its recent leak to the press. But what exactly does this entail, and how might it impact your journey towards home ownership?

A mortgage guarantee scheme essentially functions as a safety net provided by the government to incentivise lenders to offer more high Loan-to-Value (LTV) mortgages. While details regarding the 1% deposit mortgage scheme remain scarce, its resemblance to the existing 5% deposit scheme suggests a familiar structure.

To refresh, the LTV ratio represents the proportion of your property's value covered by the mortgage loan. For instance, a 1% deposit translates to a 99% LTV loan. In the current 5% deposit scheme, lenders can seek government backing for up to 15% of the loan, reducing their risk exposure in case of default. This reduces the mortgage lenders exposure risk from 95% to 80% (being 95 - 15 = 80%).

Should the new scheme mirror this arrangement, lenders may be tasked with covering a significant portion of the risk, possibly up to 84% risk for banks. This could result in higher interest rates for borrowers, translating to increased monthly mortgage payments.

As of January 2024, data from the Office for National Statistics reveals that the average UK wage stands at £29,669, which we can round up to £30,000 for simplicity. Typically, mortgage lenders extend loans of up to 4.5 times an individual's salary, meaning that someone earning the average UK wage could potentially secure a mortgage of up to £135,000.

Now, let's break down the implications of different deposit percentages on your home buying budget:

5% Deposit Scenario:

Property Value: £135,000 (95% LTV)

Deposit: £7,105 (5% of the property value)

Maximum Home Buying Budget: £142,105

1% Deposit Scenario:

Property Value: £135,000 (99% LTV)

Deposit: £1,363 (1% of the property value)

Maximum Home Buying Budget: £136,363

The comparison is clear: opting for a 1% deposit significantly reduces your home buying budget compared to a 5% deposit scenario. This reduction in budget not only limits your options but also subjects you to higher interest rates and monthly mortgage payments due even though the loan amount is the same.

It's crucial to carefully evaluate the trade-offs and implications of each deposit option, considering your long-term financial goals and affordability.

Undoubtedly, this scheme may offer relief to some First Time Buyers unable to save up a larger deposits. Yet, it's important to explore alternative options to meet your requirements and situation. Consulting a mortgage broker who specialises in FTB clients can unveil a spectrum of choices that may better align with your long-term financial goals.

Surprisingly, the market's reaction to this news contrasts starkly with the subdued response to the extension of the 5% deposit scheme announced in last year's Autumn Statement. However, it's evident that there's no such thing as a free lunch; every benefit comes with its trade-offs.

In navigating the intricacies of the housing market, it's essential to weigh the pros and cons of each option and make informed decisions that align with your aspirations for home ownership.

Empowering you with knowledge, one mortgage scheme at a time. Ready to explore your best path forward? Book a strategy call today to accelerate your journey towards owning your dream home.

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