Chancellor Jeremy Hunt is planning to launch a 99% mortgage market scheme, as the Conservatives look to woo younger voters ahead of the general election.
The scheme would be reminiscent of the Help to Buy schemes, as the loans would have some government backing. The scheme is likely to be in the Chancellor’s Budget on March 6.
If the scheme goes through borrowers will have access to the highest LTV mortgages they’ve had since before the global financial crisis, when 100% LTV mortgages were common.
Arjan Verbeek, chief executive of Perenna, a lender, said “while industry commentators have been very quick to dismiss this scheme, if done correctly, this has the potential to unlock the housing market. It is essential that the risks, like negative equity, associated with higher LTV mortgages, are mitigated, which can be achieved by combining the scheme with long-term fixed rate mortgages (LTFRM). The key is to remove market risk from borrowers, which traditional mortgage products can’t deliver. With an LTFRM, borrowers can also afford a larger loan and in some instances, up to six times their annual income. This is because the traditional mortgage products, and their ‘affordability’, are inherently linked and restricted to the lender’s much higher standard variable rate (SVR).
However, there’s a clear need for regulation to be aligned and updated to reflect the current market. The Bank of England rightly introduced a loan-to-income cap to protect against reckless lending and excess leverage, but LTFRMs should be exempt because payments are fixed for term duration. The benefits to homeownership offset the risk of leverage on a long-term fixed rate too and the removal of the limit will incentivise larger lenders to offer more LTFRMs – ultimately benefiting the consumer with greater product choice, innovation, and giving a chance to step onto the housing ladder.”
Beware 1% Deposits - Knight Frank lays into government
Knight Frank has taken the unusual step of suggesting a government proposal for the housing market is high-risk and could even provoke negative equity for some.
The Independent online newspaper claims that the government is considering one per cent deposits for first time buyers as a radical variation of the previous Help to Buy scheme, which saw some buyers able to purchase new build houses with only five per cent deposits.
Banks and building societies would have their mortgages - possibly up to 99 per cent of the property value - guaranteed by the government, according to reports based on government leaks.
However there remains scant detail about the idea, with no reference as to how this would help first time buyers pass payment affordability tests, even if they could afford the drastically reduced deposits required.
Simon Gammon, managing partner at Knight Frank Finance, said “the popularity of the scheme will depend on how the lenders opt to price these mortgages. If they are competitive, take up will be substantial, but getting rates competitive will require the government to underwrite quite a sizable proportion of the loans. Fuelling demand to this degree without a massive surge in housing supply will undoubtedly fuel house price inflation. There is also the very real prospect that any falls in house prices will leave many buyers in negative equity, with the taxpayer on the hook in the unfortunate circumstance that borrowers aren’t able to meet their payments. It’s quite a high risk strategy, and it illustrates just how few options the government has if it wants to help first time buyers in meaningful numbers in the short term.”
The house building industry has backed the idea, saying it can’t build more homes - and this boost supply - unless more people can actually be able to purchase them.
Labour deputy leader and shadow housing secretary Angela Rayner was quoted in the Independent saying the idea “completely failed to address the supply of affordable homes, or lift a finger to reform our broken planning system which has forced a generation of young people to give up on the dream of home ownership.”
An unnamed senior Labour figure told the paper “the truth of this issue is that you can’t have a serious housing policy without a real plan to drive up supply.”
The Liberal Democrats also spoke against the idea, claiming it was ironic that the party responsible for higher mortgage rates - as a result of the Liz Truss premiership - now wanted first time buyers to have 99 per cent mortgages.
The best first-time buyer policy is to build more homes
Building more homes is a better solution than mortgage schemes to support first-time buyers, a Zoopla executive has claimed. Richard Donnell, executive director at the portal, has suggested there are challenges to reported schemes being planned by the Government to support first-time buyers.
These include introducing 25-year term mortgages or 1% deposit home loans.
Donnell said "the days of first-time buyers taking on large mortgages, stretching themselves and hoping it turns out alright are well and truly over. Proposed policies like long-term mortgage rates fixed for up to 25 years are beneficial as they could negate the need to test the affordability of a buyer at a higher mortgage rate - however, the reality is that the long-term mortgage market in the UK is not developed. To get a scheme like this up and running would require more government support to kickstart it, or innovation from banks who decide to trial it.”
Addressing rumours about the introduction of 1% deposit mortgages, he warned there would be affordability issues for buyers.
Donnell also stated “a definite positive is that they get around the deposit challenge for first-time buyers - however, this is only part of the problem as affordability testing will still likely apply, even with an insurance policy to protect the bank from house price falls. In London for example, a household income of over £150,00 would be needed to afford a London home with a 5% and pass the affordability test. As it stands, building more homes for sale and rent is the best solution to keep prices and rents in check. This in itself helps first-time buyers save for a deposit while improving the choice for all."
Donnell’s commentary also revealed that renters would pay lower mortgage rates in all areas of the UK compared with rent if they purchased their rental property. In the North East, the mortgage would be a third lower than the rent.