At the virtual Conservative Party Conference on 6th October, Prime Minister Boris Johnson gestured towards a plan in the pipeline to introduce 95% Loan to Value mortgages to reinvigorate home ownership and in his words, “help turn generation rent, into generation buy.”
In the Budget last week, the Chancellor announced the new mortgage guarantee scheme, with lenders who provide a mortgage to homebuyers who can only afford a 5% deposit benefitting from a government guarantee on those loans. This will apply on home values of up to £600,000 with several leading lenders having already signed up to the scheme.
“Generation rent,” declared Sunak in the most predictable line of the speech, would become “generation buy.”
While the details of this plan remain unclear, the PM declared that there were up to 2 million potential homeowners who would be able to afford repayments but do not currently have access to a mortgage. His proposed solution is to give young, first time buyers the option of fixed rate, long term loans of up to 95% of the value of the home.
Why is this new?
Up until the pandemic, there were many lenders who were providing 95% LTV mortgages, albeit generally requiring a guarantor. Due to the economic uncertainty and job insecurity accelerated by COVID-19, those lenders have chosen to rescind these products which require lower deposits, including 90% lending. The result of this is that would-be first-time buyers who have been saving for their first home, no longer have a large enough deposit to secure their mortgage.
Although 90% lending has re-entered the market in recent weeks.
The lenders, then, will need good reason to return these low deposit mortgages to their offering. The PM has suggested reducing the ‘stress tests’ that have been in place since the 2008 financial crisis, meaning would-be buyers would have to tick fewer boxes to be considered eligible and able to afford repayments.
This relaxing of stress tests exposes the lenders to a risk of bad debts, should the economy take a downturn. To combat this, the PM has suggested a state guarantee to lenders. This would most likely come in the form of underwriting the debt; with the average home in the UK costing £220,000, underwriting 10 per cent of a deposit for 2 million buyers would leave the government and the taxpayer liable for £44billion.
The potential knock-on effects
A side effect of the temporary reduced rates of stamp duty and the subsequent inflated house prices is that first time buyers are currently hesitant to commit to high LTV mortgages, where they are able to. They fear that they are at risk of finding themselves in negative equity upon the return of full rates of stamp duty, and the possibility of reduced property value that may come with it. With reduced checks to validate who is eligible for these mortgages, we could also see a larger portion of new buyers unable to afford their repayments, turning generation buy into generation foreclosed.
While the state guarantee to lenders could incur a potential risk of £44billion of the public purse, experts believe this to be a high-end estimate, and unlikely in practice.
95% LTV mortgages were available before the pandemic, and yet owning a home remained a pipe dream for many. Why this would be different now is up for debate, but time will tell.