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Property Expert Slams Government’s 1% Deposit Mortgage Scheme Proposal

The Government’s consideration of introducing a 1% deposit mortgage scheme as a means to facilitate home ownership for young individuals has been met with criticism from Charlie Davidson, a residential property specialist at London’s Bishop & Sewell law firm. Davidson argues that the scheme, designed to lower the financial barrier for first-time buyers, is flawed and poses a significant risk of encumbering a generation with unsustainable debt levels.

Under the proposed scheme, first-time buyers would only need to provide a 1% deposit of the property’s value, leaving a staggering 99% to be covered by mortgage payments. This marks a significant departure from the current norm where a 10% deposit is standard, with some options allowing for a 5% deposit.

Davidson highlights the potential dangers of such a low deposit threshold, stating, “While the intention to make home ownership more accessible is commendable, the reality of a 1% deposit policy could lead to severe repercussions.” He expresses concern over the impracticality of encouraging individuals to take on mortgages with a 99% loan-to-value ratio, emphasizing the risk of negative equity should property prices fall or fail to rise at pace with interest rates.

The expert further warns against the broader economic risks of facilitating high levels of bad debt, drawing parallels to the US subprime mortgage crisis and its contribution to the 2007/8 global financial downturn. Davidson points out that while the policy may boost demand, it does little to address the supply side of the housing market. He notes the reliance of housing developers on contractual deposits for funding, suggesting that 1% deposits might not offer adequate capital for developers, particularly smaller ones, to complete their projects.

Additionally, Davidson sheds light on the conveyancing process, which traditionally requires a 10% contractual deposit at the point of contract exchange, separate from the mortgage deposit. This requirement could pose a challenge for buyers opting for a 1% deposit mortgage, as it necessitates upfront personal savings or resources, essentially negating the intended benefit of the scheme.

Concluding his critique, Davidson views the proposal as a potential political strategy aimed at garnering votes ahead of the General Election. He calls for a thorough evaluation of the policy’s implications, suggesting that its impact and feasibility warrant serious consideration before any political party commits to it in their election manifestos.