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?

@Paulina23 please point to where I said asset inflation helps the bottom, I have explicitly stated I do not support the continued trajectory of house prices, I am biased in that I have struggled to get onto the property ladder and I support schemes that help others get onto it because I believe in home ownership, though I am not naive enough to think it is just in their interests as to why it is done. I would be interested to know what you propose to make the property market fair and to enable affordable, sufficient housing for all? All you seem to say is prices need to drop substantially but how on Earth would you do that without bringing everyone crashing down with it?

And yes of course they've been withdrawn for a reason, but the government are mitigating the risk literally by managing the risk, create more buyers, create more stability. Banks can't do that as was evidenced in 2008, but government can hedge their bets and put money into the housing market to stabilise it which is only a good thing for them, and most others. Much better than the billions spent on the SDT holiday, despite benefiting from that myself.

I think you misunderstand me @lolulop I'm not concerned about moving up the ladder. I don't see it as an investment in that sense. If house prices only rose at the rate of inflation I'd be very happy with that, I'm not looking to make money on this house, only to preserve what we have and have a good, secure place to live, and hopefully leave something behind for us to pass on to our children.

If house prices crash by 20% that wipes out our entire deposit at one stroke, plunging us into negative equity and unable to remortgage. We'd be on the variable rate, which is hugely expensive and even if we managed to sell we'd still be left with debt. This is what I mean by a zero-sum game. I agree the current situation is entirely unsustainable but as recent first time buyers we would bear the brunt of a housing crash.

@Racquelscottish between QE, stamp duty holiday. low interest rates and now this 5 % mortgage guarantee, it makes it less likely house prices will drop 20% even with a massive recession on the horizon. It may drop 20% in some areas which rely on hospitality/aviation when the furlough scheme ends as even for properties in central london, international students will return at some point and there are many HKers who are due to move into London, many of them who own million dollar flats in HK.

@Racquelscottish but many people do need to move up the ladder & ever increasing prices don't help that.

I don't deny as recent FTBs you wouldn't bear the brunt of a reduction but people not on the ladder & paying crazy rent are also feeling the brunt.

They won't fall by 20% anyway due to all the props.

I agree OP.

Ive never had a problem saving a 10% plus deposit.

The problem is being limited to around 4x salary....

My expense are so low and I live a frugal life, that ive overpaid each of my last 2 mortgages by 100% each month, for the last 8 years.

Yet for some reason, im limited to only borrowing ~4x to 4.5x times my salary each time.

So have to keep moving house to get to the final house I want...

@BalancedIndividual deposit and affordability are two very different things. It's very frustrating when either of both are stopping you but they will be approached in different way. The former is about cushioning risk if house prices reduce and trying to avoid negative equity, the latter is about the affordability of the individual, the former is much more market dependent which is why the government can step in, take on the risk of the market reducing and in turn reduce the risk of it happening. 95% mortgages have been readily available barring short term blips in the market.

Increasing how much an individual can borrow is a much higher risk strategy and pretty much what we saw prior to 2008, much higher levels of borrowing, not just in terms of the ratio between deposit and mortgage, but actually very high levels of individual borrowing with less stringent affordability checks. A high risk strategy that didn't pay off.

What you describe having to build equity and move up the ladder is very standard, most people have to do that, if you have a small deposit then it doesn't matter what you earn, your deposit will limit the maximum value you can purchase and therefore likely needing a "starter home" and stepping stones before the preferred long term home.

I think it's a mad idea. It will inflate house prices and get people into debt.

@Viviennemary how is it mad and how will it inflate prices? 95% mortgages were readily available prior to Covid, they're not a new thing and didn't cause huge waves in the market prior to 2020 so why do you think it will now?

@lolulop the housing ladder is a really mad concept, I think. Property shouldn't be an appreciating asset to the extent a person can leverage it to buy a bigger place, simply for just having owned a place. If we wanted a bigger place one day, we'd either have to earn much more or move to a cheaper area. It's illogical to expect to achieve that any other way, though I know lots of people have.

@Racquelscottish indeed, it’s one of these myths that was happily spread by subsequent government. In fact, it s practically a prerequest to win next election, hence the whatever it takes approach. But ultimately, and like any pyramide scheme, only the ones that enter early enough will cash in while the base (aka “last fool”) will fork out the bill, it is a 0 sum game unless you find a money tree or a petrol in the back garden of course

On the back of this thread DH applied to his bank £124,500 they would lend us, we’ve been paying the equivalent of a £300,000 - £500,000 mortgage for well over ten years.

I don't disagree but that's how it's worked for so long & many people do buy into that belief. You see it all the time on property threads, people expecting to make X amount in a few yrs often without having done anything to a property. For a lot of people rising prices gives them confidence to spend. And people have no problem with making a profit but can't fathom a reduction. @Racquelscottish you yourself aren't looking to make a profit but don't want to make a loss, so you do want it to be an investment.

[quote Racquelscottish]@lolulop the housing ladder is a really mad concept, I think. Property shouldn't be an appreciating asset to the extent a person can leverage it to buy a bigger place, simply for just having owned a place. If we wanted a bigger place one day, we'd either have to earn much more or move to a cheaper area. It's illogical to expect to achieve that any other way, though I know lots of people have.[/quote]
I agree with this. Property should never have been an investment. Homes are a fundamental need.

@lolulop I don't want to lose what I have put in, does that make it an investment? If we put our deposits in a savings account and let it accumulate interest to keep up with inflation, is that an investment? We bought this place because we wanted a secure place to live.

I can't see how, if this place goes up in value by a significant amount in the next five years, that would actually help us, because the next rung of first time buyers will have a much harder time buying it off us!

If we wanted a bigger place one day, we'd either have to earn much more or move to a cheaper area. It's illogical to expect to achieve that any other way, though I know lots of people have.

Assuming you have a capital and interest mortgage you will build equity which would enable you to upsize even if prices stagnated and you earn the same. There are many parts of the UK where prices have been much more modest in their price increases, not rising much more than inflation.

I do find it mad hearing about interest only mortgages in the 80s-00s and how that concept literally relied on price rises to eventually pay off the capital balance.

You want the property to rise with inflation I would consider that an investment. It would be very rare to find a savings account these days that keeps pace with inflation.

@lolulop why shouldn't property be an investment? It's an asset. I agree house prices have gotten out of control and we need to do more to stabilise the rental market but in what society is property not an asset that increases in price AT ALL? Why should money sat in a savings account increase in price with nothing done to it? Why should pensions? It's an economy.

How would you want housing to look in your world? Who would own it? Maintain it?

I do find it mad hearing about interest only mortgages in the 80s-00s and how that concept literally relied on price rises to eventually pay off the capital balance.

I'm sure it went wrong for some people but I work with loads of people 5-10 yrs older than me who didn't earn lots but in their early 20s were able to buy a property because no deposit was needed & they could borrow 5x their salary & just get an interest only mortgage (it's very hard to get one these days). They all are now in properties worth 1m plus & have a BTL &/or a summer property.

How will it play out in the future when we have a ageing population, less immigration & more 30-40 yrs old then ever renting.

@user88899 it was @Racquelscottish who said it shouldn't be an investment, I pointed out it was.

Why should money sat in a savings account increase in price with nothing done to it?
Putting money into a savings account is probably the worse thing to do currently as you are actually losing money.

I already said upthread I would like higher interest rates so I can make money on my savings.

It's an economy.

Ever increasing house prices against the backdrop of wage stagnation (legacy of 08) & a likely future recession is not good for the economy particularly when you take into account all the props the gov have used.

@lolulop I realise that about savings, I was making the point that you don't "earn" it in savings either.

Every time I have asked the question to one of you as to what you'd like to see instead not one of you have answered, it's very boring having a discussion when one side just picks but can't offer an alternative.

Sorry what do you want an answer to? I would remove the props & raise interest rates, build more council houses but restrict R2B. Increase stamp duty levy on 2nd homes.

What would you do?

i wouldn't raise interest rates now obvs because of covid

@lolulop are you classing 95% LTV mortgages support a "prop"? So what happens to all the people that aren't wealthy enough to afford high interest rates or need support to get onto the market, they remain in rental or go in a council house? How many houses do you suppose will be on the open rental market if landlords are de-incentivised from owning second properties? What will that do to rental costs?

In the current market of rent stats as it does I would expand help to buy to the second hand market not just new builds but would reduce the cap significantly. Guarantor mortgages. Ensure 95% mortgages remain and review shared ownership, I think SO is a good idea in theory for low income people but it seems to work better with some HA than others.

I think home ownership should be widely available to those who can afford repayments, I don't think it should be for a limited few. The rental arena does need reviewing too though, I think that's partly why my views are skewed because renting in the UK is not as stable as in other European countries, perhaps if we could get the rental market more stable (more regulated) then later home ownership would be more sustainable and we wouldn't need so many "props" to get younger buyers onto the ladder because they could save a deposit over a substantial time period without fear of prices outstripping savings.

(In 2nd paragraph I'm trying to say in the current market with renting being as it is currently)