The Stamp Duty holiday appears to have stimulated the housing market. It is, however, only of benefit to people who can afford to buy. For many people, their ability to buy depends on their ability to get a mortgage. Right now, however, that is a major challenge for a large segment of the population.
From 100% to 80%
Over the course of the last 15 years, the UK has gone from a place where it was possible to get 100% mortgages to a place where 85% mortgages are considered generous. What’s more, lenders have changed from using straightforward multiples of income to use “affordability criteria”.
These changes are not necessarily bad in principle. In fact, they may even have been necessary and, ultimately, beneficial. They are, however, creating a number of challenges for individuals, the financial services sector and government.
“Generation Buy”
The Conservatives have at least one and possibly two plans to help people struggling to get mortgages. It has already been confirmed that the Help to Buy scheme will be extended albeit with changes. The main changes are that it will only be available to first-time buyers and that it will have regional caps.
There may, or may not, be another plan announced to help people with low deposits. At the Conservative party (virtual) conference, Boris Johnson announced that he wanted to make it possible for people to buy homes with only 5% deposits. Now with more 95% mortgages becoming available it would appear the government is keen to make this happen.
The truth about Help to Buy
Even if the prime minister was referring to Help to Buy 2.0., the scheme has its critics. Firstly, it is only available to people buying new-build property. This may make the scheme easier to administer. It also means, however, that buyers have a restricted choice and private sellers cannot benefit from a scheme they are subsidizing.
Secondly, it puts the taxpayer on the hook not just for defaults, but for falls in home prices. With Help to Buy (both 1.0 and 2.0) the government essentially buys a stake in the property. The maximum stake is 20%, which is quite substantial. Buyers do not have to pay anything back for five years. After that, they either pay interest on the loan or buy out the government’s share at a fair market price.
At least, that’s the theory. The reality may be very different especially in a post-COVID, post-Brexit world. If it is, then the taxpayer could end up taking a substantial hit and the buyer could end up with serious, long-term damage to their credit score.
The spectre of 2008
Even though 2008 is now more than a decade ago, it is very far from being a distant memory. Buyers, especially first-time ones, may be frustrated at the difficulty of putting together 15% to 20% deposits. Investors and economists, by contrast, may be terrified about the thought of returning to the conditions which brought about 2008.
It’s also important to remember that the bank bailouts were extremely controversial the first time around. If a major bank failed again, either it would have to be allowed to fail or it would have to be bailed out. If it was allowed to fail, then it would raise the question of why the banks were bailed out the first time. If it was bailed out, it would raise the question of why the regulators failed again.
Realistically, therefore, if 95% mortgages are made available again, even if with government backing, they will probably be extremely restricted. Most buyers will need to look at ways to put together the sort of 15% to 20% deposit modern lenders require.
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