Boris Johnson’s conference promise to create two million new homeowners with 95pc loans leaves the the mortgage industry bemused as to how it can be achieved.
Lenders, describing the scheme as little more than a reworked help-to-buy programme, have become nervous that house price falls could leave them exposed to large losses. As first-time buyers struggle to qualify for a loan without putting down a 15pc deposit, prominent lenders such as Santander and HSBC have largely withdrawn offers of 90pc and 95pc mortgage loans.
In his conference speech on Tuesday, Mr Johnson said that the Government needs to fix the ‘broken housing market’, promising buyers would be given ‘the chance to take out a long-term, fixed-rate mortgage of up to 95pc of the value of the home, vastly reducing the size of the deposit’.
The PM added that easily available low-deposit mortgages ‘could create two million more owner-occupiers, the biggest expansion of home ownership since the 1980s’. And in doing so, the ‘sclerotic’ planning system would have to be reformed.
All the same, the speech lacked specific details as to how the promises will be realised. Johnson used similar language in the 2019 election manifesto, in which the Conservatives said they would encourage a new market in long-term, fixed-rate mortgages which ‘slash the cost of deposits’.
There again, the manifesto gave few details of how this could be achieved, although it promised a review of the help-to-buy scheme when it ends in 2023.
Banks’ duty to lend responsibly
One possible means to be considered by the mortgage industry could be a relaxation of the ‘stress test’ rules on banks that were imposed following the financial crisis and which have been criticised by some for restricting lending, especially to the self-employed. Rigorous affordability rules could also be loosened.
Some type of government-backed guarantee is a more likely choice, perhaps as part of an expanded help-to-buy scheme. First-time would-be homeowners using the programme are able to take out a loan to buy a home with only a 5pc deposit, meaning the Government effectively finances 15pc of the purchase cost.
A new help-to-buy/equity loan scheme has already been announced and will open to first-time buyers for two years only, from 1 April 2021 until 31 March 2023.
UK Finance, representing the UK’s banks, said it ‘supported innovation’ and ‘lower deposits’, and added it was keen to ‘work with the Government on these proposals in due course’. The banks were, of course, aware of their obligation to lend responsibly, take account of affordability and ‘avoid the risks associated with negative equity’.
The banks emphasised the extent to which they are restricted by current regulations, as the Prudential Regulation Authority (PRA) closely monitors the proportion of their low-deposit mortgage lending to potential homeowners.
Furthermore, in compliance with Bank of England rules, only 15pc of a bank’s mortgage lending can be given to consumers who apply for a mortgage of 4.5 times or more of their income.
Insult to people priced out of home ownership
John Phillips, of Just Mortgages, which lists 500 mortgage advisers in the UK, called the Government’s aspirations ‘laudable’, but said guaranteeing such mortgages with taxpayer money cannot be regarded as sensible when the national debt is growing day by day.
James Forrester, of Birmingham estate agents Barrows and Forrester, said the failure to build more homes was the root cause of the affordability crisis. The announcement, he said, would no doubt delight a nation of home buyers already galvanized by the stamp duty holiday.
However, he added, the PM’s claim that the scheme will help fix the broken housing market is both risible and an insult to those who find themselves priced out of home ownership.
Marc von Grundherr, of London agents Benham and Reeves, commented that although the rhetoric enables Boris to fuel market sentiment, the obvious question is where the two million new homeowners will live. The fact that insufficient numbers of homes are being built means that those securing mortgages will have great difficulty in finding a property.
Craig McKinley, of the lender Kensington Mortgages, believes the ‘generation buy’ scheme will be, essentially, a replacement for help-to-buy, which boosted market confidence and encouraged lenders back into the small deposit market. Hopefully, he said, this scheme will do likewise.
Joe Garner, CEO of Nationwide Building Society, welcomed the Government’s ambition to increase home ownership and has offered support to achieve it. This is why, he said, the society promptly returned to the 90pc LTV market in July and has since been the only major lender supporting first-time buyers consistently at that level.