It was a significant announcement and one that has potentially seismic consequences for prospective first-time home buyers and a broad range of people in the property and financial industries.
Recently, The Telegraph broke an exclusive interview with Prime Minister Boris Johnson ahead of his party's annual conference. The PM had this to say: "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% of the value of the home – vastly reducing the size of the deposit. And giving the chance of home ownership, and all the joy and the pride that goes with it, to millions who currently feel excluded. We believe that this policy could create two million more owner-occupiers, the biggest expansion of home ownership since the 1980s. We will help turn generation rent into generation buy."
While some critics of the current government have been vocal about the fact this announcement comes at a time when the PM's popularity isn't exactly sky-high, the move is following up on a promise made in the latest Conservative manifesto. So, how will the Prime Minister’s plan to offer 95% mortgages work?
What we know about the proposed 5% deposit scheme
In truth, all we really know at present is that Boris Johnson has made a firm, public commitment to introducing a 95% mortgage scheme for first-time buyers – but we do have some further clues. Apart from the fact we know buyers will be able to access a home loan using a 5% deposit, the PM also revealed the scheme would offer long-term, fixed interest rates. That's going to take a bit of doing under the current economic circumstances – but it's not impossible, so let's take a look at how the government might make it work.
What might happen, and can the government make 95% mortgages work?
So, how will the Prime Minister's plan to offer 95% mortgages work? The real answer to that question, for now, is that we're not entirely sure. However, it certainly could work, depending on how the government goes about structuring the scheme. It's quite a radical and ambitious declaration from the PM, and making that into something more than just a sound bite will take work.
In fact, transforming a whole generation of renters into an army of homeowners is going to take a major effort. Still, the current government has already demonstrated a genuine will to reduce the number of buy-to-let purchases. Boris Johnson also heads up the same political party that was behind the last shake-up of the UK housing market that could be considered in the same bracket as this proposed new scheme, when Margaret Thatcher introduced Right to Buy back in 1980.
How home lending changed after the 2008 global financial crisis
One of the most likely elements of any successful 5% deposit option for first-time buyers would have to be some form of government underwriting. In the aftermath of the 2008 financial crisis, home lending changed significantly, and 100% mortgages disappeared completely. It wasn't just the infamous old zero-deposit home loans that became extinct following the global financial crash, though. Most high Loan to Value (LTV) mortgages disappeared at the same time as 100% mortgages did. That was because when a buyer uses a lower deposit to make a substantial purchase, they're a lot more vulnerable to the broader economic climate. It's far more likely you'll end up with negative equity in a recession if you only put 5% down on a house, and that makes you far less likely to be able to afford mortgage repayments too.
The main difference between mortgage lending before and after the crash comes down to how banks assess applications from borrowers. After 2008, stress tests got introduced, with the main aim of protecting lenders against the effects of hikes in interest rates or waves of job losses caused by a fluctuating economy.
Long-term borrowers like home mortgage holders are particularly vulnerable to longer-term changes like recession or downturns. After the 2008 crisis, banks began to apply worst-case scenario models to applicants. It became far harder to get access to home loans as a result.
In 2020, banks would likely need some pretty solid assurances to get on board with any scheme that required such a relatively small deposit – especially in the wake of one of the most disruptive years in living memory. The fact that most lenders pulled their higher LTV options after the pandemic hit is a very good indicator of how wide-scale job losses and economic turmoil can affect confidence and limit access to borrowing.
Related: Changes To Shared Ownership Scheme For First-time Buyers
How would government underwriting work?
In essence, it seems the PM plans to make the 95% mortgage scheme work by offering the banks a guarantee. Given the current state of mortgage lending and deposits required to get on the property ladder, that would see the government underwrite something between 5 – 10% of the purchase price of a home.
There are a lot of potential first-time buyers in the UK so that that commitment would stretch into tens of billions of pounds. Still, it's unlikely we'd ever see a worst-case scenario happen, and the government's vulnerability to economic downturns would be a lot lower in reality.
Help To Buy versus the new proposed 95% mortgage scheme
It's unclear how many potential homeowners would actually take up the offer of a 95% mortgage, and the scheme would have some drawbacks for first-time buyers. Having less equity in a home from the outset of a loan agreement does leave buyers more vulnerable to a change in their financial circumstances, and it makes remortgaging harder too. However, the big test for the new scheme is going to be when it gets compared with the existing Help to Buy programme.
Help to Buy ticks a lot of boxes for first-time buyers. The fact is, in England, you can already buy a home up to £600,000 in value using Help to Buy if you've only saved a 5% deposit, and that's not the only advantage it offers. A government-provided equity loan makes up the difference in providing a more sizeable down payment to the mortgage lender. On top of your 5% deposit, the equity loan can meet up to 20% of the purchase price, meaning lenders get a deposit of 25%. If you're buying a home in London, that equity loan limit rises to 40%.
Under Help to Buy, that equity loan is interest-free for the first five years – which can represent a significant saving. While you can repay over 25 years, you're free to pay the government portion of your borrowing back more quickly, without penalty. Whether or not the proposed programme can live up to that remains to be seen. In order to compare the incoming and outgoing schemes, we're going to have to wait for more details about 'Generation Buy' to be revealed. The Help to Buy scheme is due to end in 2023, so many first-time buyers will be looking to take advantage of the scheme and get on the property ladder before then.
Furthermore, with the current stamp duty holiday and possible extension, there will be significant savings to be made if homebuyers purchase a first home for under £500,000.
Stamp Duty Holiday: Buy In Leyton For Under £500,000
Stamp Duty Holiday: Save On Property For Sale In South London
Stamp Duty Holiday: Save On Property For Sale In North London
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It's getting easier to get on the property ladder, and with an ongoing commitment from the government to reduce the number of UK renters, there's never been a better time to weigh up your options.
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