Boris Johnson’s pledge to create 2 million new owner-occupiers with a new raft of 95% loans has left the mortgage industry bemused and puzzled as to how it can be achieved – with lenders describing it as little more than a revamped help-to-buy scheme.
In recent months low-deposit mortgages have virtually disappeared in Britain, as lenders have become fearful that house price falls could leave them exposed to big losses. Major lenders such as HSBC and Santander have mostly withdrawn from offering 90% and 95% mortgage loans, with first-time buyers struggling to qualify for a loan without putting down a 15% deposit.
In his conference speech, Johnson said: “We need to fix our broken housing market,” promising that buyers would be given “the chance to take out a long-term, fixed-rate mortgage of up to 95% of the value of the home, vastly reducing the size of the deposit”.
Easily available low-deposit mortgages “could create 2 million more owner occupiers, the biggest expansion of home ownership since the 1980s”, said the prime minister, adding that the “sclerotic” planning system would be also be overhauled.
But the speech was short on detail of how the promises will be fulfilled. The language used by Johnson was similar to the 2019 election manifesto, in which the Conservatives said: “We will encourage a new market in long-term, fixed-rate mortgages which slash the cost of deposits.” But the manifesto gave few indicators as to how this could be achieved, although it promised a review of the help-to-buy scheme when it comes to an end in 2023.
One potential route touted inside the mortgage industry is a relaxation of the “stress test” rules on banks that came into force after the financial crisis, which are criticised by some for hindering lending, especially to the self-employed. Stringent affordability rules could also be eased.
A more likely option is some sort of government-backed guarantee, maybe as part of an expanded help-to-buy scheme. Under help to buy, first-time buyers are able to take out a loan to buy a home with just a 5% deposit, with the government effectively stepping in and financing 15% of the purchase cost.
The government has already announced that a help to buy: equity loan scheme will open to first-time buyers from 1 April 2021, but for two years only, ending on 31 March 2023.
Mortgage indemnity guarantees and insurance policies, which protect the lender if a borrower stops paying, could also make a return. But they disappeared during the 1990s as few insurers were prepared to take on the risk.
UK Finance, which represents Britain’s banks, said it “supported innovation” and “lower deposits”, adding it was keen on “working with the government on these proposals in due course”.
But it added that the banks were mindful of their duty to lend responsibly, take account of affordability and “avoid the risks associated with negative equity”.
The banks also highlighted how much they were restricted by current regulations – with the Prudential Regulatory Authority closely monitoring the proportion of low-deposit mortgage lending by the banks. In addition, under Bank of England rules, only 15% of a bank’s mortgage lending can go to people who apply for mortgages of 4.5 times or more of their income.
John Phillips of Just Mortgages, which has 500 mortgage advisers in the UK, called the government’s aspiration “laudable”. But he added: “Guaranteeing such mortgages with taxpayer money cannot be the way to go at a time when the national debt is growing by the day.”
Johnson’s pledge to create “generation buy” comes amid one of the strangest episodes in Britain’s long history of property booms and bust. The lockdown effectively killed off the property market, but it has exploded into life since, partly propelled by the chancellor, Rishi Sunak’s stamp duty cut, announced in July. House prices are currently rising at their fastest rate since 2016, yet more than 2 million struggling households applied for a mortgage holiday after the virus struck.
In Birmingham, James Forrester of local estate agents Barrows and Forrester said a failure to build more homes was at the root of the affordability crisis. “Today’s announcement will no doubt excite a nation of aspirational homebuyers who have already been sent into a frenzy over the prospect of paying no stamp duty.
“However, for Boris Johnson to claim this will help fix our broken housing market is not only laughable but quite frankly an insult to those who find themselves priced out of homeownership.”
Marc von Grundherr of London agents Benham and Reeves added: “Creating 2 million more homeowners is a lovely bit of rhetoric for Boris to fuel market sentiment, but it comes with a clear and obvious problem. Where are they going to live?
“We’re simply not building enough homes and the government’s head-in-the-sand approach to this burning issue is going to bring about problems when those securing these new mortgages actually look for a home.”
Craig McKinlay, of the lender Kensington Mortgages, said: “The ‘generation buy’ scheme, will, in effect, be a replacement for help to buy … help to buy helped boost confidence and ease lenders back into the small deposit market and we hope this scheme will do the same.”
Joe Garner, the chief executive of Nationwide Building Society, added: “We welcome the government’s ambition to expand homeownership and we have offered our support to achieve this. It is also why we quickly returned to the 90% LTV market in July and have been the only major lender consistently supporting first-time buyers at that level since then.”