First-time buyers are set to be given a further helping hand after Boris Johnson used his keynote speech at the virtual Tory party conference to outline 95% mortgages in a new ‘generation buy’ scheme.
In an effort to inject some positivity and optimism into a government struggling to cope with a second spike of coronavirus, the Prime Minister promised a scheme to enable first-time buyers to get a mortgage with only a 5% deposit, as part of plans to turn ‘generation rent’ into ‘generation buy’.
Johnson told the virtual conference audience that he hoped the plan would create two million new homeowners. However, little detail was offered on how the ‘long-term, fixed rate’ mortgages might work.
The PM said the Conservatives needed to ‘fix our broken housing market’ and help those young people who can’t afford large deposits onto the property ladder regardless. Some experts have suggested the plan could cost tens of billions of pounds, while critics have questioned how this scheme is any different to the Help to Buy scheme which is set to end in its current format in April next year.
Johnson, though, insisted he would ‘transform the sclerotic planning system’ and make it faster and easier to build new homes ‘without destroying the green belt or desecrating our countryside’. At the same time, he admitted that these reforms would take time and wouldn’t be enough on their own to solve the issues at hand.
The PM said the government now needed to take forward one of the key proposals of its 2019 manifesto: namely giving young, first-time buyers the chance to take out a long-term, fixed-rate mortgage of up to 95% of the value of the home – significantly reducing the size of the deposit needed.
Such a policy, he said, represents the biggest expansion of home ownership since the 1980s when Margaret Thatcher introduced Right to Buy.
How will the high LTV mortgages work in practice?
The PM’s speech offered little detail on how the new mortgage scheme would actually function, and there was no confirmation on whether the government would underwrite the mortgages or not.
said that one possibility would be for banks to remove the stringent stress tests introduced after the global financial crash of 2008, which were designed to stop irresponsible lending to those who couldn’t afford their mortgage repayments.
The stress tests are used to assess whether a buyer will be able to keep up with mortgage repayments even if interest rates rise from their current historic low of 0.1%
and in situations where job losses or loss of income are more likely to occur.
Rather than stress tests for these 95% mortgages, the government could instead guarantee these higher loans, taking on the risk instead of lenders.
There will be concerns, like with Johnson’s other proposed scheme for first-time buyers, the discounted First Homes initiative
, that the new mortgage scheme lacks substance. The First Homes scheme is still being consulted on despite being officially announced in February, and more details beyond the great headlines will be required before the merits of the new 95% mortgages can be judged.
While further support for the first-time buyer market, one of the largest house-buying demographics, is welcome – more so now than ever - others will be concerned that two new separate schemes for first-time buyers could confuse things slightly. That’s not to mention the Help to Buy scheme, which will be aimed only at first-time buyers in certain regions from 1st April next year (which can be applied for from 16th December this year), and schemes like Shared Ownership.
There will also be concerns about the costs involved, at a time of recession, further lockdowns and significant job losses, and the potential dangers that higher LTV mortgages pose during times of uncertainty.
It was noticeable that lenders stopped nearly all 95% and 90% mortgages during the worst of the pandemic
, due to the risks at play, and the government will need to provide more reassurances about the safeguards and protections in place for first-time buyers to win popular support for this new scheme.
The idea of long-term fixed-rate mortgages which slash the cost of deposits is nothing new – it was mentioned in the government’s manifesto in December last year – but the devil, as always, will be in the detail. And so far we don’t have a great deal of that for either the new mortgage scheme or the First Homes one.
What was the reaction to the announcement?
The BBC’s Economics Editor, Faisal Islam, warned of the possible large costs involved: “If it’s 2 million people, and average size of a first-time buyer mortgage is £185,300 – and market currently serving 75% LTV and below with cheap rates, but not 95% – back of the envelope, that’s several tens of billions of guarantees to cover possible losses.”
Rob Houghton, chief executive of Reallymoving, commented: “We support the government's efforts to reduce barriers for first-time buyers and welcome the return of 95% mortgages with caution. For those who have been saving a deposit for many years this will be welcome news, enabling them to make the first step onto the property ladder, but we would urge people to proceed with caution, consider the risks carefully and think long term about their property choices.”
He added: “The Mortgage Market Review, which came into force after the credit crunch, remains in place to protect buyers from the kind of irresponsible lending practices we've seen in the past.”
The Bank of England recently published new data showing further increase in interest rates for high LTV mortgages in September, which could cause further difficulties for first-time buyers seeking to participate in the property market, despite the pledges to create a ‘generation buy’.
Simon Gammon, managing partner at Knight Frank Finance, said such figures will make for alarming reading both for hopeful first-time buyers and the Prime Minister.
“Average two-year fixed rates at 95% LTV are now higher than any time since June 2018, while those at 90% are higher than at any time since June 2015. Lenders are still grappling with the effects of the pandemic, like closures of overseas call centres and skeleton staff, and as a result have become focused on gaining market share at lower LTVs, which are less risky.”
“The manner in which the property market has burst back to life since the lockdown means there's plenty of business to go around at those lower LTVs, so raising rates at the other end of the market effectively stems the flow of new applications to a more manageable level.”
He added: “The government has indicated it is considering state guarantees for higher value lending and we wholeheartedly support measures aimed at enabling first-time buyers get a foot on the housing ladder. However, it’s unclear at this stage that many lenders will want to take part due to concerns over how affordable these mortgages will be over the long-term.”
John Phillips, national operations manager at Just Mortgages, said the government’s aspiration to get more people on the housing ladder was laudable and something that ‘most people would be in favour of’.
“However, guaranteeing such mortgages with taxpayer money cannot be the way to go at a time when the national debt is growing by the day,” he added.
Why are higher loan to value mortgages deemed riskier?
Those purchasing a home with a lower deposit are generally seen as higher risk, from a lending point of view, because they are at greater risk of negative equity if property prices start to decline not rise.
While house prices have so far remained remarkably robust, there are concerns that this could change as the furlough scheme ends, job losses increase and further lockdowns are potentially imposed.
Many lenders chose to withdraw low deposit mortgages, widely available at the start of the year, during the height of the pandemic, as the lending environment was far riskier.
Before the global financial crisis, higher loan to value mortgages were far more commonplace, with people able to access 100% mortgages if they wanted to. This all ended after 2008, and it took a long time for major banks and building societies to start reintroducing higher LTV mortgages – even then, they very often came with caveats and tighter restrictions.
The government’s scheme, if it took on the burden of risk instead of the lenders, could help to make 95% mortgages more accessible again, as well as being less risky. The Help to Buy scheme did something similar when it launched in 2013, offering a way for first-time buyers to purchase with a much lower deposit, but that scheme hasn’t been without major criticism for artificially inflating house prices and a host of other issues.
Like all government housing schemes, the proof of the pudding will be in the eating, and we will only be able to judge how successful a 95% mortgage scheme might be once more details are sketched out. For now, a number of question marks remain.