How will the Prime Ministers plan to offer 95% mortgages work?

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Prime Minister Boris Johnson today promised to turn ‘generation rent into generation buy’ with plans to boost the availability of long-term mortgages for homebuyers with a small deposit.

In a speech to the virtual Conservative Party conference the PM said up to two million people who could afford repayments cannot currently get home loans.

He said: ‘We need now to take forward one of the key proposals of our manifesto of 2019: giving young, first-time buyers the chance to take out a long-term, fixed-rate mortgage of up to 95 per cent of the value of the home – vastly reducing the size of the deposit. 

‘We will help turn generation rent into generation buy.’ 

Large mortgages for borrowers with just a five per cent deposit have been available in recent years, but since the Covid crisis hit lenders have pulled all of these deals, save for a few specialist options.

And lenders are also being more stringent with who they will lend to on their 90 per cent loan-to-value deals. 

This, coupled with rising house prices, has left many first-time buyers with no way of financing their first home – leaving many to shelve their plans and continue to rent.  

While the Prime Minister gave little detail today on how the plan would work in practice, the Telegraph reported that Johnson has asked Ministers to draw up plans which could see banks remove ‘stress tests’ brought in after the financial crisis of 2008/09.

This means applicants would have to jump through fewer financial hoops in order to secure a loan.

Currently borrowers have to undergo stringent affordability tests when applying for a mortgage – so that lenders are no longer hit with a string of bad debts when the economy goes sour. 

These include assessments of income, expenditure and existing debts, verification of income, an assessment of future income, and ‘stress tests’ to see if they could keep up with repayment if rates were to rise.

The criteria could potentially be relaxed under the Prime Minister’s new plans. Instead, the Government would extend a form of ‘state guarantee’ to lenders in order to absorb the risk, the Telegraph reported.

It’s likely the Government is offering to underwrite this risk as a way to encourage more banks and building societies to start lending to small deposit borrowers again. 

In theory this would leave the taxpayer on the hook for potentially huge sums. 

Underwriting 10 per cent of a deposit on an average £220,000 first home for two million buyers could leave the government liable for £44billion. However, the likelihood of that liability crystalising is remote.

One mortgage expert, who backed the scheme, said the £44billion liability was likely to be a top-end estimate.

David McGrail, Compliance Director at UK-based mortgage broker and advice firm, First Mortgage, said the government could end up underwriting just five per cent of a deposit due to there still being good value in the 90 percent loan-to-value market – meaning a £22billion liability.

He said the government’s announcement could stimulate the return of 95 per cent loan-to-value mortgages and that the plan was a positive move for both brokers and buyers.

Mr McGrail told MailOnline: ‘The 95 per cent loan-to-value mortgages dropped away particularly because of concerns about the job market, unemployment and property values. 

‘But if the government steps in and offers that protection it will make a big difference.

‘It’s only a risk if the property market falls or property prices plummet. But considering the situation, these are good times and the market is going really well at the moment.

‘And this extra scheme should drive this on further. So this shouldn’t come with a huge risk.’  

Meanwhile, Iain McKenzie, CEO of The Guild of Property Professionals, believes the government could underpin as much as 20 per cent of a property.

He told MailOnline: ‘One could argue that it is a very good idea based on the fact that the UK is teetering on the brink a substantial recession, possibly as bad as the 1930s, and any stimulus that promotes growth and income generation for the wider economy has to be positive.

‘The Government is underpinning house price growth and therefore effectively talking about a 15 per cent to 20 per cent equity of any property, the difference between 80 per cent LTV and 95 per cent LTV.

‘In 2010, the average house price was £170,000 whereas now in 2020 it is £237,000, and so from a long-term perspective any investment in property over the last 30 years or more has actually been a very good return on investment.

‘The Government under current projections is guaranteed to get any investment back when a property is resold.’

However, he urged the government to keep current rules over the vetting of mortgage candidates, saying it would increase the risk.

He said: ‘The only thing that would make it a poor decision would be if the Government removes all regulation and vetting of candidates to borrow the money in the first instance.

Because if they lend money to people that genuinely can’t afford it, it will just increase the number of repossessions and increase the problem in the housing market.’ 

No announcements have been made yet on who will be eligible for the scheme, whether it will be exclusively for first-time buyers, or whether anyone will be able to take advantage.

However, the relaxing of affordability rules could boost the chances of getting a mortgage for a worker who has been furloughed, or a self-employed worker whose business has been hit by lockdown.

The Prime Minister’s plans are intended to encourage ‘long-term’ mortgages, but in his speech he didn’t give any detail into how long term these deals could be. 

In November last year the Conservatives promised to open a ‘new market’ in long-term, fixed-rate mortgages for first-time buyers, in particular for those with small deposits – similar to deals in America and Europe where 30-year mortgages are more normal.

The party suggested enlisting funding from institutional investors such as pension funds in order to do this.

However, experts within the mortgage sector cast doubts on how successful such a scheme would be, citing a potential lack of consumer appetite for locking into a deal for so long.

Chief among most borrowers’ concerns would be fixing at too high a level during the interest rate cycle, and whether these long term deals would carry expensive exit fees.

Though with the base rate currently sitting at a record low of 0.1 per cent it may be a tempting offer to some, and the number of borrowers taking five and 10 year fixed-rate deals is growing.

This, combined with the current low cost of borrowing for banks themselves, has pushed rates on longer term mortgages down to historically low levels. 

Though the Prime Minister’s announcement has won plaudits from some quarters, some in the mortgage industry have already voiced concerns over how it might be funded.

Mortgage broker Just Mortgages’s John Phillips, said: ‘The government’s aspiration to get more people on the housing ladder is laudable and something that most people would be in favour of. 

‘However, guaranteeing such mortgages with tax payer money cannot be the way to go at a time when the national debt is growing by the day.’

Rob Houghton, chief executive of Reallymoving said: ‘We support the Government’s efforts to reduce barriers for first-time buyers and welcome the return of 95 per cent 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.

‘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.’  

Martijn van der Heijden of mortgage broker Habito said: ‘A minimum deposit of 20 per cent is now needed for most mortgages, which is extremely prohibitive for those looking to get on the ladder for the first time. 

‘Lenders need to be able to responsibly reintroduce products at higher loan-to-values to support first-time buyers and give them the best choices and outcomes.’

Craig McKinlay of specialist lender Kensington Mortgages said: ‘The ‘Generation Buy’ scheme will be, in effect, a replacement for Help to Buy. 

‘Only a few lenders are dipping in and out of the high loan-to-value market at present with ‘flash sales’ due to sheer demand – so this should reassure some lenders to enter more permanently and support first-time buyers.’