An analysis of Government plans to partially underwrite 95% mortgages

On the 6th October 2020, the Prime Minister verbally proposed plans to enable 95% mortgages for first time buyers. Later, in the 2021 budget, this appeared in writing: “A new mortgage guarantee scheme will enable all UK homebuyers to secure a mortgage up to £600,000 with a 5% deposit”. This marks a 50% decrease from the 10% deposit requirements of the majority of pre-existing high loan to value (LTV) mortgages, and a 66% decrease from the average 15% deposit in the UK. With its stated aim being to allow more first-time buyers into the market, many have welcomed the intent, but questioned its effectiveness. Questions of effectiveness have subsequently led to questions about other potential motives, and ultimately the effects this decision may have on first-time and existing homeowners alike.

Underpinning the move, as claimed by the Boris Johnson, is an apparent discrepancy in mortgage eligibility requirements. The Prime Minister claims that up to 2 million people in the UK don’t qualify for a mortgage not because they can’t afford the repayments, but because the deposit requirements are too high. Whether this is due to overly inflated house prices or simply banks’ high-risk aversions are a matter left unanswered, but regardless, the Government appears to believe that lower deposits will solve the problem. However, some claim the move won’t actually help first time buyers at all, with Henry Pryor, an independent property buying agent, quoted in the Financial Times as saying “Will it help first-time buyers? No. Will it make what they’re trying to buy more expensive? Yes.” In essence, taking the position that while deposits might reduce in percentage terms, price inflation caused by the new demand will ensure that the real cash value of deposits remains high. Others claim that even if it does set out to help first time buyers, it’s not the kind of help they want. For example, Victoria Bischoff, the MoneyMail editor, recently wrote: “Generation rent don’t want 95% mortgages – they want house prices to come crashing down”. Based on the diversity of conflicting initial reactions, it seems confidence in the Government’s plan is less than they may have hoped for.

Despite the ambiguity surrounding benefits for first time buyers, few people disagree that the move will likely put upwards pressure on house prices. If this is the case, it could potentially counteract any downwards pressure on house prices from a COVID-19 related recession, or if powerful enough, actually increase house prices (by up to 8% according to Neal Hudson, an independent market analyst). Either way, it seems likely that the result will be a housing market propped-up by Government intervention. In this case, some of the major beneficiaries of the government’s decision are likely to be companies and individuals with wealth/capital tied up in residential property. Hence, some have claimed that securing the value of the 1.8 trillion GBP of wealth tied up in UK housing was, if not the driving force, at least a substantial motive.

However, while the move seems likely to benefit existing homeowners, whether or not it will help first-time buyers depends on a multitude of factors. Firstly, that the 2 million people the PM claims are restricted from buying solely due to the deposit, can actually afford the new deposit. It’s entirely possible that even when reduced to 5%, the actual cash amount that this entails may still be too high for some. Secondly, that any house price increases the scheme may cause does not result in first-time buyers failing the subsequent affordability requirements of the higher value mortgages needed. It could be the case that while they may be able to afford the new deposits, they now cannot afford the repayments – how much those repayments could increase depends on both the new prices and the new interest rates. The interest rates in question subsequently depend on, with all other factors constant, the extra risk lenders perceive in a 95% mortgage versus one with a larger deposit. Theoretically, this risk could be minimal for the lender as the Government plans to enable the lower deposits by guaranteeing a portion of the loan, effectively underwriting the extra risk. But even when underwritten by the Government, it still exists, and if it results in a higher default rate, the resultant administrative costs will still negatively affect the lender. Thus, it’s not unlikely that the new 95% mortgages may come with substantially higher affordability requirements. Ultimately, given the large number of variables to consider, calculating if first-time buyers stand to benefit from the government’s decision is highly reliant on assuming what the significance of each one may be.

In conclusion, for existing homeowners the decision is likely to be beneficial as they stand to benefit from upwards pressure on house prices. However, homeowners could be negatively affected if riskier lending fuelled by Government underwriting causes a housing market crash. But this situation seems unlikely, since if the Government increases its exposure to the market, as this move will do, they should be heavily incentivised to prevent a crash. David McGrail, Compliance Director at mortgage broker and advice firm, First Mortgage, estimates their exposure at around 22 billion GBP, thus providing a substantial incentive. For first-time buyers, whether they benefit or not is less predictable and dependent on a multitude of factors. However, these can be summarised into a single question: Can prospective buyers, once the Government guaranteed 95% mortgages become available, now purchase their first house, where before they could not? If the answer is yes for the majority of first-time prospective buyers, then it can be concluded that the Government scheme should benefit prospective buyers. However, the answer to this question will likely only be known to a reasonable degree of certainty once enough time has passed for the full effect of the scheme to become apparent. Therefore, in the meantime, the answer remains uncertain.

By David Bendle

Sector Head: James Float

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