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?

I agree with others that this will just keep the bottom end of the market inflated. How about, off the top of my head -

Stopping non-residents from purchasing/not allowing them to buy unless the property has been advertised locally first?

Sorting out the cladding scandal?

Enforcing minimum build quality and space standards on developments?

Forcing developers to include appropriate amenities in new developments?

I've done well out of the UK/SE property market (unusually given that I'm relatively young) but it is sclerotic.

Thing is it may just push prices up again like a lot of the stamp duty savings last yr were added to the prices.

@EssentialHummus absolutely agree

As someone who has just bought these threads terrify me. Don't get me wrong, with my sensible hat on I'd love for houses to come back down to prices that mean people could afford good, secure homes. It's just common sense. But once you're actually on the ladder, if prices crash that means negative equity, debt, loss of really hard-earned savings, potentially becoming mortgage prisoners. It's like a zero-sum game for either those on the ladder and those off it. Prices have to keep rising to keep people on the ladder happy, but that's coming totally at the expense of everyone who doesn't have funds for a deposit.

It isn't @Racquelscottish unless you have a very high LTV ratio. Generally moving up the ladder costs more when prices are rising.

This is a good article pre covid

www.google.co.uk/amp/s/amp.ft.com/content/5c49931e-9ddd-3db3-8a67-3fc2bc18f0d2

would be a lot more helpful for this couple on 100k combined if the price were to fall by 50%

I'm not sure how helpful it would be for the market to crash 50% plunging a huge number of property owners into negative equity, stall the market, and then make mortgages nigh on impossible to get for FTBs due to risk averse lending. But yes sure, let's just make houses cheaper, it's just that easy

@PurplePansy05

High earners with low salaries will likely be able to weather any economic changes and are more likely to have flexible, professional roles, meaning more financial flexibility in general.

Who are "high earners with low salaries"?

We bought 4 years ago with a 95% LTV (there were multiple available at the time) mortgage, then sold and bought a house double the value of the first one with an 85% LTV. The difference in our position now vs then is huge and we would not be where we are without the first higher LTV mortgage. FWIW one of us was training at the time and the other one climbing the ladder, we weren't cash rich or high earners and it was extremely helpful to be able to buy. However, I agree that this is likely to help couples/young families/joint purchasers more than sole purchasers. I think the issue is that the latter are often completely priced out to begin with, for some their salaries are too low to buy full stop, but that's a separate issue to tackle. I would not dismiss the 95% mortgages for that reason.

Typo. I meant high earners with low savings

I bought my house for £137k with a deposit of only 7k.

It is true as op said: a lot of people do struggle with the multiple rather than the deposit. Often as well with contract types and guaranteeing annual regular pay even though YoY their income is average.

This isn’t a policy designed to help those most in need, but rather the children of middle England whose bank of mum and dad only goes to 5%. Remember, it’s valid to £600k.

(Background in affordable housing.)

If you earn 100k plus you can borrow x 5 or 5.5 x your salary.

It's a stupid policy, and the housing ladder has been getting more akin to a pyramid scheme with every instance of misguided government intervention.

@purpletrees16 stats? Evidence? Everyone I know has struggled with the deposit more than the mortgage multiple, if you're paying upwards of £1000 in rent (often more) then even those on good salaries are going to struggle building 10% deposits with enough for legal fees etc. Not everyone inherits or can live with families to build deposits. Both my brother and I bought with 5% deposits, neither had any help, it's not rocket science, it's a lot easier to get to 5% than it is 10% however you're trying to get there. It's wilfully ignorant to pretend this doesn't help thousands of first time buyers, no it doesn't help everyone, no certainly doesn't help the lower income households that struggle with the mortgage multiple, but it is hugely helpful to thousands of households in the trap of high rent, low deposit.

No, but the PRA sets lending limits in this way.

@user88899

would be a lot more helpful for this couple on 100k combined if the price were to fall by 50%

I'm not sure how helpful it would be for the market to crash 50% plunging a huge number of property owners into negative equity, stall the market, and then make mortgages nigh on impossible to get for FTBs due to risk averse lending. But yes sure, let's just make houses cheaper, it's just that easy

I’m not sure how helpful it would be for the market to boom by 100% excluding a huge number of the population of home ownership, stall the market and then makes mortgages nigh impossible to get for FTBs do to the ludicrous amount of savings and earnings needed to afford anything with a door on. But yes sure, let’s just make houses more expensive, it’s just that easy, and that s what happened since 2007 where prices have doubled.

We bought with a 5% deposit 5 years ago.

Our issue was we had good salaries but it was difficult to build the savings while paying expensive rent (we live in SE), also every time we got near 10% house prices in our area were increasing so our 10% suddenly became 9%

@Paulina23 yes a 3 month SDT extension and reintroduction of 95% mortgages that have only been off the market 12 months as we enter a hugely economically turbulent time post Covid and Brexit is obviously going to cause the housing market to boom 100%

Pressed post too soon....

Once we were in we started overpaying the mortgage

I think people like us will benefit the most, not low earners

I didn’t say that, the price doubling already happened in London between 2007 and 2015, flat since then. What it does though is preventing market forces to act freely and realign with people’s earning. Instead the government only obsession is to spend precious tax payers money on scheme to keep the Ponzi going and more and more money to get parked in an unproductive asset.

@Paulina23 letting the market "act naturally" will only push those at the bottom out of the market as it always does, the wealthy will be just fine. I'm not saying I agree with house prices or the incessant propping up at all costs, but I absolutely support this scheme that enables households who could manage a mortgage payment to get out of the cycle of rent, it is ludicrous buyers who have demonstrated 4 figure rents for years can't get accepted for monthly mortgage agreements much less than that. I don't see the point in punishing those in order to make a stance against house prices when it'll be the same people profiting no matter what. Taking on some risk for the 95% mortgage market is much less controversial, or expensive, than the SDT holiday which largely helped those in the middle to keep the market propped.

I’m confused, is this being touted as a new thing? We bought our house two years ago on a 95% mortgage (not H2B) as did my brother and sister in law, worked out very well for both of us. Our 8k deposit is now worth 40k as our house price has increased by over 30k. I know they aren’t available now because of Covid, but they were definitely available before the pandemic.

@Elsiebear90 exactly, no 95% LTV mortgages aren't a new thing, but mortgage companies aren't offering them at the moment due to the economic uncertainty, so it's a scheme whereby the government takes on some of the risk to encourage mortgage companies to reinstate them, which will then hopefully reduce the risk anyway if it keeps the market afloat with still enough buyers at the bottom of the ladder. Hopefully it'll help keep the market ticking along, I very much doubt it's going to create any massive boom because as you say we've had them for years it's only because of Covid they've gone, because despite what some people seem to think a market crash is bad for most people one way or another.

I think most are aware a crash is bad & unlikely however a slow small reduction is not a bad thing. This will likely cause more stagnation.

I agree the SD relief didn't really help FTBs

@user88899 you re getting your baseline assumptions mixed up probably because you have significant paper gain from your own property ownership. Asset price inflation does not help the “bottom”, disparity has never been so big between the 0.1% and the rest since QE started in 2008. Instead, what this policy does is encouraging priced out people to leverage themselves to their eye balls to keep the bubble going up while what renters really need is lower price, not a subsidised mortgage deal on an overpriced asset. When the penny finally drops, Johnson will be long gone but millions of household will be stuck with a irresponsible level of borrowing with a much higher interest rate to pay each month. The 95% mortgages were pulled out by banks for a reason, this being that they anticipate difficulties in the economy that will affect mortgage owner to service the debt. And forcing their hand by guaranteeing the amount can potentially cost many times what the stamp duty holiday has cost us (few billions that could have been used to retrain people for instance) when the tax payers will have to step in yet again as a last resort guarantor like in 2008.

@Paulina23 asset price inflation also doesn't help many home owners, only those who wish to significantly downsize and live off their equity gains in later life. From what i can see, it makes it much harder to upgrade. MIL sold her flat for a loss in the 1990s but was able to upgrade to a house. But before that was completely unable to afford anything larger than a 1 bed flat during the housing boom.

Even if i can sell my london flat more easily because FTB are getting help, I still can't sell if I can't afford buy a bigger flat/terrace in my area.