Low-deposit mortgages have virtually disappeared in Britain in recent months as lenders have become concerned about potentially big losses
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 Major lenders such as HSBC and Santander have mostly withdrawn from offering 90% and 95% mortgage loans, with first-time buyers struggling to qualify for a loan without putting down a 15% deposit.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 also be overhauled.
But the speech was short on detail of how the promises will be fulfilled.
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.
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