Boris Johnson announces 95% mortgage scheme to create ‘generation buy’
Speaking at 2020’s ‘virtual’ Conservative Party Conference, Prime Minister Boris Johnson announced plans to improve access to 5% deposit mortgages for first-time buyers.
He said the plan would create 2 million more owner-occupiers in the UK.
The Prime Minister has reportedly asked ministers to design the plan, which would involve removing stress tests for mortgage applicants, instead extending “a form of state guarantee” to lenders to remove risk from the loans.
Johnson commented: “I think a huge, huge number of people feel totally excluded from capitalism, from the idea of homeownership, which is so vital for our society. And we’re going to fix that – ‘Generation Buy’ is what we’re going for.”
“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.”
The announcement is likely to come as welcome relief to a nation of aspirational homebuyers, already buoyed by the prospect of not paying stamp duty.
Will 95% mortgages solve the UK’s housing problem?
Many industry insiders feel that Johnson’s claim that government underwritten mortgages will be sufficient to fix the country’s broken housing market is ‘laughable’. It could also be seen as an insult to those who find themselves priced out of homeownership.
Critics say that the cause of the dire housing situation we find ourselves in is due to the Government’s sustained failure to build enough affordable housing year in, year out.
The inadequate supply of housing to meet demand is one of the driving factors that has caused house prices to spiral and to continue to mask this failure by further fueling demand is irresponsible.
Many feel the Government’s time would be better spent reallocating wrongly classified green belt land so it can be utilised for housing and preventing the big housebuilders from drip-feeding housing supply in order to keep their profits up.
How the scheme will work
Currently, borrowers have to undergo stringent affordability tests when applying for a mortgage – so that lenders are no longer hit with a string of bad debts when the economy goes sour.
These include assessments of income, expenditure and existing debts, verification of income, an assessment of future income, and ‘stress tests’ to see if they could keep up with repayment if rates were to rise.
The criteria could potentially be relaxed under the Prime Minister’s new plans and instead, the Government would extend a form of ‘state guarantee’ to lenders in order to absorb the risk. It’s likely the Government is offering to underwrite this risk as a way to encourage more banks and building societies to start lending to small deposit borrowers again.
However, in theory, this would leave the taxpayer on the hook for potentially huge sums.
David McGrail, Compliance Director at UK-based mortgage broker and advice firm, First Mortgage, said that if the government underwrites 5% of a deposit on an average £220,000 first home for two million buyers, the potential liability would be a whopping £22billion.
Mr. McGrail said: ‘The 95% loan-to-value mortgages dropped away particularly because of concerns about the job market, unemployment and property values. But if the government steps in and offers that protection it will make a big difference.’
‘It’s only a risk if the property market falls or property prices plummet. But considering the situation, these are good times and the market is going really well at the moment and this extra scheme should drive this on further. So this shouldn’t come with a huge risk.’
In 2010, the average house price was £170,000 whereas now in 2020 it is £237,000, and so from a long-term perspective, any investment in property over the last 30 years or more has actually been a very good return on investment.
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