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“From generation rent to generation buy” – a phrase first uttered by David Cameron at the Conservative Party conference in 2015. In heralding “a dramatic shift in housing policy,” he announced that new “affordable homes” should be available to buy as well as to rent.
Fast forward five years and those words were again uttered from the same platform, this time from the lips of Boris Johnson. Vowing to “fix our broken housing market,” the prime minister announced last month his intention to introduce state-backed 95% mortgages for first-time buyers. But with the government remaining tight-lipped on the detail, and with such low-deposit mortgages currently as rare as hen’s teeth, when might there be cause for optimism among those desperate to take that first step on the property ladder?
The reality is that a state-backed low-deposit scheme remains little more than a policy concept – and one in its very early stages of development. Indeed, there remain significant questions as to the practicalities of bringing it to fruition. The idea is to link high (95%) loan-to-value mortgages to a long-term fixed interest rate, but this would represent a fundamental departure from the traditional funding model for UK residential mortgages.
With such a scheme likely to prove hugely popular, the Bank of England’s Financial Policy Committee’s rules would need to be addressed. Currently, they limit the number of new residential mortgages with a loan to income ratio of 4.5 or greater, to no more than 15% of a lender’s total number of new loans. An increase (and in all likelihood a significant one) in that percentage, will inevitably be followed by a corresponding increase in defaults. Even with the government adopting some of the risk, it is difficult to envisage lenders not increasing interest rates to reflect that.
The majority of mortgages are arranged through brokers and therein lies another problem; brokers encourage shorter-term deals – typically 2 or 3 years – to ensure repeat business. This practice would have to change.
Much work to do
The government has many stakeholders to engage with, some with contrary or conflicting interests. Nevertheless, with the prominence given to the announcement, there will undoubtedly be significant ministerial pressure to launch a low-deposit scheme during this parliament. But with the devil in the detail, it is difficult to see first-time buyers’ prayers answered any time soon.