Prime Minister Boris Johnson hopes to bring back affordable 95% mortgages and ‘create two million more owner-occupiers’ under a new scheme already being dubbed ‘Generation Buy’. It is not yet at all clear how the scheme would work, or what it might cost, but millions of frustrated buyers are doubtless hoping that it might help them at last get on the property ladder.
After a wobble at the start of the pandemic, the property market has experienced a big bounce back since due to the stamp duty holiday. House prices have risen at 7.3% annually, the fastest rate since 2016, and the average home is now worth £249,870. Although this may have helped existing owners and estate agents, prospective buyers have surely rolled their eyes at prices climbing further out of reach – even as borrowing has become more difficult.
‘The brick ceiling’ – the deposit problem first-time buyers face
This is because lenders meanwhile have cut back on their best deals for new buyers, spurred by the understandable fear of a Covid recession. Back in June, Nationwide withdrew all its 95% mortgages for new buyers, setting a new maximum of 85% (i.e. requiring a deposit of 15% of the property’s value). Currently that would require an average deposit of over £37,000 – well beyond the reach of most would-be buyers who may already be struggling with their rent.
Some 95% mortgages are still available from select lenders such as Virgin Money, but these come with problems of their own. Virgin’s deal is a 15-year fixed rate at 4.58% as compared to 2.99% for an 85% mortgage, so the repayments will be significantly higher and the overall loan much more expensive.
The hope (and at this stage, a hope is all it is) is that the government plans to intervene somehow in the mortgage market to make high loan-to-value mortgages both more widely available, and more affordable.
How would the Generation Buy scheme work?
Currently the government is still running the Help to Buy scheme, which similarly enables people to buy new build homes with as little as 5% deposit by using an ‘equity loan’ of up to 20% plus a 75% mortgage. This has been extended until 2023, but it’s clear that the new scheme is intended to be something different, as it was not announced as an enhancement of Help to Buy.
The most popular theory is that the government plans to underwrite 95% mortgages with public money, to safeguard lenders against losses if borrowers default while in negative equity. This in turn would remove the need for the ‘stress tests’ currently required from banks, which force them to have more capital in reserve to cover low-deposit mortgages.
It seems likely that the scheme would have tighter restrictions than the Help to Buy scheme, which is open to both first-time buyers and existing homeowners. To reduce costs, the government would probably limit this guarantee scheme to first-time buyers only, and will probably also have a lower cap on the maximum value of the property being bought. Help to Buy is capped at £600,000 and applies to new builds only. The government could potentially save billions by capping the new scheme at a much lower figure, while perhaps opening it up to all properties and not just new builds. Again, this is conjecture at this time.
What would a mortgage guarantee scheme cost?
According to Faisal Islam, the BBC’s Economics Editor, the scheme might have up to two million applicants with an average first-time buyer mortgage of £185,300. He estimated that this would require tens of billions of pounds worth of guarantees to cover the potential losses. Not all of this money would necessarily be spent, just held in reserve – but for comparison, the UK’s defence budget is £55 billion and the NHS just over double that. This kind of state involvement in a commercial market may be a hard sell for a Tory government to vote through, which should prompt speculation as to whether the scheme is intended to work in some other way that does not involve guarantees.
Is this just a recipe for Financial Crash 2.0?
A scheme to lift more lower-income buyers onto the housing ladder may evoke memories of the US sub-prime housing crisis, where millions were offered loans they could not afford and defaulted on them, a mis-selling scandal that triggered the 2008 Financial Crash. Back then, governments had to bail out the banks to prevent them from collapsing. This time – if the theories are correct – the UK government is considering taking on the burden directly, ‘cutting out the middle-man’ to some extent by agreeing to guarantee bad loans in advance.
Needless to say, this is a very high-risk strategy. The intervention would risk exacerbating one of the problems it is trying to address – high house prices – by keeping these artificially high. This in turn could result in steeper negative equity if mass unemployment causes a price crash in the future. Still, for the individual more concerned with having an affordable home than the state of the economy, there is reason to be cautiously optimistic.
What are the other options for first-time buyers right now?
In addition to the well-known Help to Buy scheme already mentioned, there are two recent developments that will be of interest to anyone hoping to buy their first home in the near future. One is the Affordable Housing Programme, which is intended to create up to 180,000 ‘affordable’ new homes outside of London by 2026. This will include social housing and shared ownership homes.
Available sooner than this, however, is the First Homes scheme, to provide discounted homes for local first-time buyers and key workers in England. The timescale is still yet to be confirmed, but it looks likely to become available early in 2021. The First Homes scheme will enable first-time buyers to purchase a home at a 30% discount from the market value, a discount that they will then pass on to the next buyer (who must also be a first-time buyer). Properties will be capped at £250,000 across England except in London, where it will be £420,000. Buyers will have their combined income capped at £80,000 (£90,000 in London), so it should provide significant new opportunities for mid- and lower earners.
Depending on what the new Generation Buy scheme turns out to be, the fortunes of first-time buyers may finally start to improve in the near future. In the meantime, the prospects of affording a first home can always be improved by finding a good mortgage broker.
A version of this article was previously published by Unbiased 7th October 2020