We need to talk about 95% mortgages

There have been a lot of upbeat headlines about the Chancellor’s new 5% deposit mortgages. But look beyond those headlines, and you’ll see that the story isn’t quite so positive…

Let’s get one thing out of the way first: guaranteed 5% deposits can and will make a difference to some homebuyers. And that’s a good thing. But it’s an initiative that is papering over the cracks; an inadequate solution for a much deeper issue – affordability.

The suggestion that a lack of 95% mortgages is the reason why people can’t get on the housing ladder is misleading. It’s a convenient, headline-generating distraction. The real reason why people are struggling to get on the ladder is because house prices are too high for them. Prices have been rocketing over the past year – an official 8.5% to December 2020, and I suspect more since then – and it follows that affordability is becoming an increasing problem.

Looking back, did the market need the Stamp Duty holiday in 2020? That’s a debate for another time, but there’s no doubt that it was a major contributing factor to our upwardly-mobile house prices. (And the Chancellor’s recent SDLT extension will no doubt push them even further out of reach.)

Reheat and serve

So far – and despite the initiative being leaked well in advance of the Budget – the details behind the mortgage guarantee are yet to be confirmed (which isn’t at all helpful when you’re a mortgage broker fielding enquiries from intrigued homebuyers all day). But many in the industry feel it will be a rehash of an old initiative and the cost of it will either be borne by taxpayers or the homebuyer in the form of a premium that will be wrapped up in their mortgage. It’s also likely that the Government will offer an insurance to lenders that reduces their risk, and unsurprisingly, the lenders will embrace the deal with open arms.

At the same time, the Government has been in talks with lenders about reviewing stress testing. Currently, lenders tend to work to an interest increase of 3% over the reversion rate specified in the mortgage contract, and if applicants can afford to make that higher payment, they’re likely to be approved for the mortgage. But if lenders were to stress test to 2%, then affordability becomes that bit easier (it also helps people move into higher purchasing price brackets).

Repossessions are down

Let’s not forget, the current affordability model is a lot more fit for purpose than the previous system and works well in the sense that repossession rates hadn’t been bad. It’s perhaps a contentious observation, but by moving away from the old ‘3.5x income’ model, we’ve generally seen a decline in repossessions and less people losing their homes. My fear is that, if we reduce stress testing and strip down affordability, this may become more of an issue once more.

And, almost as an aside, it’s worth noting that there are restrictions on some lenders as to the amount of lending they can do that’s of high loan to value (i.e., they can’t offer a high proportion of 95% mortgages).

The real issue

We don’t have a broken housing market at the moment. We don’t have a lack of people who are able to buy – we have a lack of properties that they can buy. And a lot of this is down to a lack of stock. Feeding into that, many house builders and developers also place a (financial) premium on the stock that they do build, which shuts out many potential buyers.

A way forward

It’ll come as no surprise that I believe in the Shared Ownership system; it provides a proven and affordable way for people to get on to the housing ladder and buying their own homes. We should be supporting the Housing Associations and developers working in this area and perhaps looking at more innovative ways of delivering housing.

Shouldn’t we, as a sector, be examining how we live and what we really need from a home and building from there? As an example, could Germany’s multigenerational homes work in the UK? There are many different ways of living, and properties can come in all sorts of shapes and sizes. And yet we seem to keep on repeating what we’ve done before – and running into the same issues.

We can find mechanisms and create ways for people to buy homes that they can afford and take pride in, not to mention feel safe and secure in. And that, in my view, would make for much better headlines.


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