Prime minster Boris Johnson’s plans to turn ‘generation rent’ into ‘generation buy’ using long-term fixed rate mortgages with only 5% deposits have been met with scepticism from experts.
The proposals, which Johnson announced yesterday at the virtual Conservative Party Conference, involve making more long-term 95% loan-to-value mortgages available for first-time buyers.
These are mortgage where a loan is given for 95% of the value of a property, therefore the buyer requires only a 5% deposit. The mortgages would be ‘long-term fixed rates’, which means the rate would stay the same for the lifetime of the mortgage, which could be 25 or 30 years.
The aim is to create more opportunities for homeownership amongst the two million young people who struggle to get onto the property ladder because they cannot afford larger deposits to put down on a mortgage.
The reforms were first mooted by the Conservatives in their election manifesto last year as part of a range of measures aimed at fixing the broken housing system.
But while the idea in principle was welcomed, there were a number of concerns raised by commentators in the mortgage and property industry.
Many were worried about the lack of detail but others thought the reforms would not go far enough to solve the housing crisis.
Paresh Raja, CEO, Market Financial Solutions, said while reform was ‘promising’, he feared it was too little, too late.
“This scheme will not be launched until next year and we still don’t know how it will work in practice,” he added.
“Mortgage delays and denials could rise in the coming months, particularly with the furlough scheme coming to an end and banks seeking to minimise their risk exposure. If not addressed, we could see buyer momentum suddenly coming to a halt.
“Both mainstream and alternative finance lenders need to step up and work with their customers so that they can successfully complete on a sale during the holiday period.”
Mortgage guarantees
Another area of concern was around how any potential risk might be allayed. There had been some speculation the government would provide a guarantee to ensure mortgage lenders were not left with the responsibility for big loans. Indeed, since the financial crisis lenders have put in place stringent stress tests to ensure borrowers are not overstretched.
John Phillips, national operations manager at Just Mortgages, said: “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.
“If the government wants lenders to bring back higher LTV mortgages then surely the sensible thing to do is to reintroduce a Mortgage Indemnity Guarantee (MIG) scheme.”
Phillips explained, these were widespread up until the year 2000. They were paid by the borrower and protected the lender against loss in the event of the borrower stopping paying their mortgage.
He added: “While some considered it unfair that the borrower paid the insurance premium it did ultimately benefit the borrower as it ensured a large number of high LTV mortgages.
“If the government really does want to bring back high LTV mortgages this has to be the way forwards as mortgages guaranteed by the tax payer are clearly not sustainable at a time when government borrowing has now exceeded our annual GDP.”
Bigger picture
There was also criticism the prime minister was not looking at the bigger picture in terms of the housing crisis.
Mary-Anne Bowring, group managing director at Ringley and creator of PlanetRent, which provides rental management software, said: “The government’s disparaging talk about turning Generation Rent into Generation Buy ignores the fact that more people are renting and for longer, often as a lifestyle choice, and in today’s footloose society having a mortgage can be as much a burden as a bonus.
“If the government was genuinely serious about fixing the housing crisis, rather than focusing on demand-side subsidies it would focus on boosting supply across the board, with a mix of tenures.
“At a time when banks are pulling higher loan-to-income mortgages due to the profound economic uncertainty that coronavirus has caused, the government risks looking massively irresponsible by calling for their reintroduction and suggesting taxpayers’ money could be used to underwrite them.”
