- Boris Johnson has outlined plans for a new scheme to increase the number of mortgages available at 95% LTV.
He fears that, “people feel totally excluded from capitalism, from the idea of home ownership, which is so vital for our society and we’re going to fix that”.
The government are considering removing stress tests from mortgage applications in hopes that it will turn, “Generation rent into generation buy”
3.6 million people out of home ownership
A report by the Centre for Policy Studies found that increased deposits and tighter Bank of England regulations had tilted the housing market towards buy-to-let investors and excluded 3.6 million people out of home ownership.
This is supported by the Office for National Statistics which recently shared that between 1991 and 2016, the proportion of 25-to-39-year-olds who owned their own home almost halved, falling from 67% to 38%.
In light of these revelations and in response the economic affects of Coronavirus, the UK government is considering the possibility that banks and mortgage lenders remove affordability stress tests which were introduced after the financial crash in 2008.
What is a stress Test and what is the benefit of removing it?
Stress tests are designed to assess whether a buyer can comfortably afford their new mortgage as well as their current outgoings. A stress Test also determines whether the borrower could afford their mortgage if interest rates were to increase.
A similar scheme was introduced as part of the Help to Buy programme in the wake of the 2008 financial crash, when banks and building societies withdrew high loan-to-value mortgages. Prior to the crash, buyers had been able to access 100% loans, meaning they required no deposit.
However, high LTV lending and a lack of stress testing could put lenders at risk of loss, especially if interest rates were to increase and borrowers became unable to afford their mortgage repayments.
It has been suggested that the risk of loss to lenders will be taken on by the Government, which could guarantee these higher loans, though this has not be confirmed.
PM acknowledges homeownership for under 40s has plummeted
Speaking at a Conservative party visual conference, Boris Johnson relaid his plans for long term, fixed rate mortgages up to 95% of the value of a property.
Stating that, “reforms would take time” Johnson acknowledged that the government needed to “transform the sclerotic planning system”.
Many would-be buyers in 2020 feel unable to save substantial deposits large enough to secure their own homes.
He said, “The disgraceful truth is that levels of owner occupation for the under 40s have plummeted in this country and millions of people are forced to pay through the nose to rent a home they don’t truly love or can make their own.”
He went on to say that, “For most people it is still true that there is an overwhelming instinct to buy”, with the level of deposit needed proving a barrier.
We need mortgages that will help people really get on the housing ladder even if they have only a very small amount to pay by way of deposit, the 95% mortgages.
“I think it could be absolutely revolutionary, particularly for young people.”
Are 95% LTV mortgage a good idea?
As of October 2020, the availability for 95% mortgages, especially for first-time buyers, is low. Economic uncertainty, job loss and Covid-19 have all played their part in the tightening of eligibility criteria and the subsequent and additional barrier to homeownership.
Some lenders, though not all, are asking for higher deposit requirements, so the news that the government is planning to increase availability of lending to those with 5% deposits, could be welcomed by many.
However, as with any loan, a 95% loan-to value (LTV) mortgage is something to be carefully considered as it could affect your finances and ultimately your ability to ascertain credit in the future, especially if the repayments are unaffordable for you.
How does deposit size affect LTV and risk for repossession?
The size of a deposit is essentially the amount of the cost of the property a borrower has to pay upfront. So, if a property had a market value of £150,000, a 5% deposit would be £7,500.
The rest of the value would need to be paid with a 95% LTV mortgage of £142,500.
Usually, the higher the LTV, the lower the deposit, however the better interest rates are often offered to those with larger deposits and therefore lower LTV rates.
That’s because a larger deposit means you own a higher amount of equity in the property and therefore borrow less.
Furthermore, if you were to get approved for a 95% mortgage, you could be at risk of negative equity, which in some cases can lead to repossession.
Owning a larger proportion of the property increases the amount of equity you own and can therefore mitigate against this risk in the event that UK property prices fall and result in you owing more to your lender than your property is worth.
Johnson plans for long term, fixed rate mortgages
Little details have been released concerning how 95% mortgages will work and which lenders will offer them, though usually, lower deposit deals can also come with higher interest rates and terms that could mean you’re fixed into a long-term contract.
A higher interest would mean paying more for your mortgage overall. Some mortgage deals are fixed for 2-4 years, whereas others have locked in rates for as long as 10 years. That could mean paying exit fees if you ever wanted to switch your mortgage to a better rate in the future.
Chief of housing and homelessness charity, Shelter raises concerns
Polly Neate, chief executive of Shelter, said: “You have to question whether the Prime Minister is in touch with reality, he is talking about giant mortgages at a time when more than 320,000 private renters have fallen behind on their rent as a result of Covid-19. Offering up huge loans and even more debt is the wrong answer to the much bigger problem of rising housing insecurity in this country.”