New 5% mortgages - is this a major flaw in the plan?

[TedMullins]

I’m musing over the new 5% LTV deals that are going to be announced in the budget. I’m aware the small print of these mortgages hasn’t been released yet and won’t be until they’re available in April, but it struck me that unless the amount you can borrow based on salary vastly increases, these won’t make much difference to most people?

For example. Let’s say someone earns 20k and has 10k in savings. If you can borrow 4.5x salary, the bank would give them 90k. Add their 10k, and they can afford a property worth 100k. If said person only has 5k savings, will the bank lend them the extra 5k to cover the shortfall? This would be more than the standard 4.5x salary.

Going back to the 10k - thats 5% of 200k, so some people with around that amount saved may be thinking great, my budget has increased to 200k and I can get a better property. But if they earn 20k and can still only borrow 4.5x salary, they’re still not going to be able to afford it surely?

I’m thinking that either a) the amount you can borrow will be increased quite substantially to 5 or 6x salary which seems like a big risk in the current economy, or, more likely b) the only people who will actually benefit from this are those who are already decent or high earners, or live somewhere where property is extremely cheap. What do you think?

It depends where you are and who you're buying with. A typical starter home here is about £200k. A 95% mortgage makes that possible for a couple on a little over £20k each.

I'm no expert, and didn't need a 5% deposit ( we were fortunate enough to be able to put down more than that) but lenders insisted on 2 incomes. We are low earners, but combined income was satisfactory. It did mean delaying though, ( post baby i left job, then needed enough time in new job before providing finical background blah blah)

So maybe suitable for couples more than single people?

For many people, the deposit is the big obstacle as, even on a good income, saving up tens of thousands of pounds whilst you’re also paying a high rent is very difficult. I have several would-be FTB friends who earn good salaries and could feasibly afford a £400k flat (London), but don’t have the £60,000 plus needed for a deposit.

Lending multiples will still be capped by the limits set by the FCA on the number of mortgages lenders are allowed to issue per quarter at more than 4.5 times income. There’s no suggestion that’s going to change - although needing a lower deposit could be could news for younger people working at junior level in the types of careers lenders will usually consider an acceptable risk for a 5 or 6 times salary mortgage.

I think that’s right that it may be more beneficial for couples and people with high salaries but low savings. But I feel that people on average/low incomes, with small savings, in expensive areas, will still be priced out if they can’t borrow enough to afford something at the bottom end of their local market

Interest rates are as low as they've ever been and will increase at some point. There's no benefit to anyone in lenders giving loans that people can't afford to repay. 95% LTV will help lots of people. If people can't make the salary multiple they can't afford the repayments, why would you want them to be able to access the loan?

I do not see how these 95% loan to value or 5% deposit mortgages are long term sustainable. I am assuming these products will be for a standard 15-25 year term at initially record low discounted introductory borrowing rates. The low rates will not last forever. And these securitisations tend to work best in a stable economic situation with foreseeable economic growth and importantly asset house price appreciation. I believe we are in the worst ever recorded economic depression as the shit is about the hit the fan for obvious reasons as the continued quantitative easing helicopter money printing magic money machine will soon crash and burn as this level of public borrowing can not be sustainable. If the housing market crashes which I suspect is likely we will see much negative equity and a disastrous toxic loan book making the previous housing crash look like a gentle practice run. The UK housing market depends much on asset price appreciation and overseas inward investment and demand especially in core metropolitan markets such as centre London retaining some sort of regional business base for global firms post Brexit as we are yet to get equivalence let alone lost passporting rights for many complex value added professional services in the City and financial markets. These financial mortgage products are probably designed to get more people into the ownership game and only work if house prices remain high to get house builders to build more units as more profitable. The supply and demand equilibrium has always been a challenge with limited new housing stock (in high demand areas where the more attractive salary jobs (pre pandemic) are located compared to increasing housing demand and year on year growing deficits. Just my humble opinion as always seek latest independent financial advice from multiple specialist sources and not a stranger online!

@Notabove25

Interest rates are as low as they've ever been and will increase at some point. There's no benefit to anyone in lenders giving loans that people can't afford to repay. 95% LTV will help lots of people. If people can't make the salary multiple they can't afford the repayments, why would you want them to be able to access the loan?

I’m not saying I want them to be able to access the loan. I agree it wouldn’t be a financially sound idea. I’m just speculating that the people who most need help with housing - those on a low income in an expensive area - won’t really benefit from this. I’m not intending to take out a 95% mortgage myself

@ComtesseDeSpair

For many people, the deposit is the big obstacle as, even on a good income, saving up tens of thousands of pounds whilst you’re also paying a high rent is very difficult. I have several would-be FTB friends who earn good salaries and could feasibly afford a £400k flat (London), but don’t have the £60,000 plus needed for a deposit.

Lending multiples will still be capped by the limits set by the FCA on the number of mortgages lenders are allowed to issue per quarter at more than 4.5 times income. There’s no suggestion that’s going to change - although needing a lower deposit could be could news for younger people working at junior level in the types of careers lenders will usually consider an acceptable risk for a 5 or 6 times salary mortgage.

There is no FCA cap in the way you put it but lenders must lens responsibly and affordability assessmenta tend to be more stringent the higher the LTV.

I’m excited by this announcement and look forward to hearing more on the detail. We fall into the bracket of high earners and low deposit. As another poster said it is really hard paying a high rent, childcare fees and usual life expenses. We just are not able to save up any more than we currently are any faster.

So for the AIBU, I don’t believe this is a major flaw in the plan. There are various schemes around for people on lower salaries, which is great.
I had personally felt like the focus has been for so long on young people getting onto the ladder - they keep talking about doing FTB!

I had felt forgotten about and sad that we would never be able to afford a property even though we are older and earn well. We don’t have any other options really as the regional cap on the revised H2B scheme is too low to buy a house to meet our needs and we earn too much for the shared ownership scheme, plus that’s not an idea I like. Then there was nothing, but to save as we are and wait for a few years to see what’s available - our rented place is too small and I would rather not live here whilst we continue to save, but next place would cost the equivalent of mortgage payments and we really would have to reduce how much we currently save.

The deposit has been the biggest obstacle. This guarantee allows us to buy an older property (not for new builds).

As a note, I do understand about inevitable market crash/adjustment/correction, whatever it will be called. However for us, at our ages with young kids, we just want a stable home and can start working towards paying off our mortgage. We are closer to retirement than a young FTB and don’t want to be paying rent when we don’t have an equivalent income. We would also intend to stay there for some time, so a dip wouldn’t be an issue overall.

I think people need to assess on what their long term plans are before going down this route, especially as economy wise there’s a lot of uncertainty.

When we were buying our budget was limited by the size of our deposit rather than salaries. For us this wasn't a huge problem as we just bought something cheaper but in some areas it would be the difference between being able to get a house or not.

We got a a mortgage with a 5% deposit in 2008. Lived in the property 10 years. When we sold, we were then in a position to put down a 20% deposit on our next place.

I dont see the problem with 5% deposit?

I think this is less about the dip but more about the dip+future interest rate increase. That combo could be quite scary, especially if your finances were balanced precariously and small equity.

DP and I are on 'low' salaries. We bought our first house last year, mortgage is similar to what our rent was. The only stumbling block we gad was getting a deposit together. In the end we had a ppi payout and I was made redundant which gave us the lump we needed for 10% deposit. If it hadn't been for that we wouldn't have got a mortgage.

A 5% deposit, with the same size mortgage would have meant our budget would have been 171000 rather than 180000. Next to no difference in house, but massive difference in timing - we probably could have bought 10 years earlier.

We are in a very similar situation @Loveacheekysausage. I’m very interested I hearing more about it when info is released.

Also, should have said, a 9k deposit in a 10% mortgage would have possibly bought a bedsit/studio flat in our area, if we were lucky. Not suitable for a family at all, so no point buying that from a quality of life pov, especially as we were renting (and bought) a 3 bed with parking and garden.

Also, if we'd bought 10yrs earlier, on a 5% mortgage we would have had a longer mortgage term (DP's age has limited it) so would have had a cheaper monthly payment, so even better off!

@BernadetteRostankowskiWolowitz

We got a a mortgage with a 5% deposit in 2008. Lived in the property 10 years. When we sold, we were then in a position to put down a 20% deposit on our next place.

I dont see the problem with 5% deposit?

Because there's not a lot of leeway if something goes wrong and the house has to be repossessed. The lender needs to be comfortable that they'll be able to get back whatever they lend from day one. The interest rate is like a risk factor - the higher the LTV the higher the interest rate needs to be so the bank can cover any shortfall upon repossession. The higher the loan value to more chance of negative equity and the house being worth less than the mortgage taken out on it.

So-

A £200k house - requires a 5% deposit = £10k. The mortgage is 190k. LTV is 95%.

Houses generally go up in price (eg the old adage 'Safe as Houses')

However, the 2008 recession caused houses to drop by an average of 20%, and Covid is causing unpredictability.

So imagine, because of Covid, there is another recession and house prices drop by 20%. The 200k house is suddenly worth 120K, but the bank has lent 190k for the buyer to buy it... And then the buyer can no longer afford the repayments, because they have lost their job because of the recession. The bank has now lost 70k.

Now imagine the 200k house was bought by someone with 50% deposit of 100k. The mortgage is 100k, the LTV is 50%. Houses drop 20% and the buyer loses their job and the house is repossessed - the house is worth 120k but the mortgage is 100k, so the bank gets all their outlay back.

So basically, the higher the LTV the more risky it is for the lender. And Covid is causing unpredictability and banks are being cautious.

So imagine, because of Covid, there is another recession and house prices drop by 20%. The 200k house is suddenly worth 120K

20% of 200k is 40k not 80k!

Oh yes it is isn't it, I saw 40k in my head but think I took off 40%. But yes, the principal is the same! I think I need more sleep 🤦‍♂️

I'm not sure this will work as lower earners are generally those in a position to not be able to save anyway.

So if someone is on their own on say £20k
£20k x 4.5 = £90k

• £10k deposit

That wouldn't buy anything round here even the very small 1 bed flats you're looking at £120-150k

We got our house with a 5% deposit 15 years ago. I'm glad we did, otherwise we would have had to move. We basically were able to buy our long term home as first time buyers , saving so much moving costs.

@TedMullins

I’m musing over the new 5% LTV deals that are going to be announced in the budget. I’m aware the small print of these mortgages hasn’t been released yet and won’t be until they’re available in April, but it struck me that unless the amount you can borrow based on salary vastly increases, these won’t make much difference to most people?

For example. Let’s say someone earns 20k and has 10k in savings. If you can borrow 4.5x salary, the bank would give them 90k. Add their 10k, and they can afford a property worth 100k. If said person only has 5k savings, will the bank lend them the extra 5k to cover the shortfall? This would be more than the standard 4.5x salary.

Going back to the 10k - thats 5% of 200k, so some people with around that amount saved may be thinking great, my budget has increased to 200k and I can get a better property. But if they earn 20k and can still only borrow 4.5x salary, they’re still not going to be able to afford it surely?

I’m thinking that either a) the amount you can borrow will be increased quite substantially to 5 or 6x salary which seems like a big risk in the current economy, or, more likely b) the only people who will actually benefit from this are those who are already decent or high earners, or live somewhere where property is extremely cheap. What do you think?

Yeah we are medium earners in very expensive area to live.

Doesn’t help us at all. We need jobs in our sectors that don’t happen to be pissing distance from London.

I think it's a good idea tbh, it will allow those who would probably buy in a few years to be able to buy now and stimulate the housing market and then the economy.

It won't help those who will never be able to buy a property in the area they want to because they don't earn enough, for that to happen house prices need to fall and that's definitely not something that we want to happen.

But for those who earn enough but can't save enough quickly enough it's the perfect solution.

I think the stamp duty holiday putting prices up plus the 5% deposit propping this up will create a perfect storm of putting people in negative equity if the interest prices rise and house prices fall. I actually think it’s really irresponsible of the government.

*interest rates, not prices