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?

[quote user88899]@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? [/quote]
It shouldn’t be an asset full stop. It should be regulated heavily and accessible to all. This could look like caps on price rises, caps on how many homes one person can own, rent caps, end of right to buy, return of lifetime tenancies, incentives for landlords to go down the housing co-op route rather than BTL investments, a requirement to be resident in a property for a certain amount of time if buying from overseas, an end to the leasehold system/ban on developers selling freeholds, restrictions on the sale price of purpose built shared ownership and help to buy... I accept that in the economic system we operate under there needs to be a certain amount of profit for the people investing in and building houses but there’s no need for it to be completely unregulated.

www.thetimes.co.uk/article/budget-2021-first-time-buyers-new-loans-mortgages-05njdm5gx

‘Ministers are also looking at other ways to help first-time buyers. These could include 25-year loans for 95 per cent of the value of the property.’

Well here we are at the next government prop.

I said last year that the stamp duty holiday would cause a small mini boom and cause house prices to rise as the average national statistics would be skewed due to the amount of transactions in the £500k area.

But ultimately house prices would then gradually go into a downturn to reflect the drop in demand for city centre flats and expensive London suburbs dropping in value as more people move out to WFH wanting more space and they would without government props.

I did say the government would throw whatever they had to keep the momentum in the housing market because our economy is so reliant on ever growing house prices, and here we are. So basically extending the HTB to all properties, FTB and non-FTB. The next step after that is government mortgages as outlined in the quote above.

The banks won’t lend at these multiples in this economic environment at 95%. Hence the government stepping in.

The danger is interest rates rising. We have been in a disinflation cycle for 40 years, and that is now ending which has got the banks spooked. The last time we had an inflationary economic environment was in the 70’s, where interest rates were scarily high. Look at the US their mortgage rates are already rising.

How do we know this? Long term treasury yield rates are rising (meaning demand has dropped for government bonds i.e lots more money will be printed).

The government actually want inflation to a degree (to inflate away all the debt). Problem is when that inflation overshoots, interest rates then rise to prevent hyperinflation.

Banks withdraw products in line with this risk (They learnt the hard way after 2008). The government is now pouring fuel on the fire in the midst of the biggest recession that we’ve ever seen. The government are now indicating that they would be prepared to take mortgage lending away from the banks entirely.

It’s nothing like 95% interest only mortgages from the 90/00’s (of which I had one). The average house is now x8 the average earnings, in London that increases to x14. This is totally out of sync and is why the banks will not increase their risk.

It is now a waiting game of governments taking over the ownership of assets and mortgages entirely, as it’s now at a stage where it’s too big to fail and the government will continue to support HPI at any cost. Obviously there’s the small matter of the global economy all in the same boat. If the house of cards all comes down then house prices will be the least of everyone’s worries.

are you classing 95% LTV mortgages support a "prop"?

In these circumstances, with the ending of H2B & the SD? absolutely!

Yes it's wrong that renting often costs more than a mortgage & people are prevented from getting a mortgage due to high deposits. I just don't think the solution is to keep prices ridiculously high. There should be far more restrictions on renting so it's not seen so much as the worst option.

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.

But that's what we have currently because prices are so prohibitive.

@Lightscribe Agree

@Lightscribe i actualy think we are heading towards Japanification of the economy. I read an interesting paper the other day about how demographics (aging population) impact on interest rates. So a long period of stagnation, ultra low interest rates and practically no economic growth, lost generation of young people.

How this would impact on house prices? I don't know but I predict that the areas of the UK where people finance their homes primarily through income would be affected. The areas in London/SE where people finance their purchases through built equity/family wealth/inheritance and which are popular with foreign investors and newly arrived HKers would be less affected. Similar to how private school fees have outstripped any kind of wage growth in professional jobs since 2008.

Just listening to a crime podcast set in Japan, we will probably be like them.

@onlychildandhamster snap!

The podcast mentioned that violent crime whilst historically low was steadily rising & an impact of the bleak economic prospects for many.

@lolulop our housing market is really different from them though, like with most of Asia, people really favour new builds and homes are not built to last. The main value in property is the value of the land it is standing on even if its an apartment. And they have far more liberal city planning laws and they can build taller blocks.

Once read that betting on the uk property market is like a bet on uk planning laws. People want single family housing near urban areas (even the countryside home needs to be within a short drive to a town). Every time they want to build homes anywhere, the local residents protest.And we can't build on greenbelt land. its as much a supply problem as a problem of ultra low interest rates.

I don’t think it is a big supply problem (some areas it is).
People are living in houses they just need to be able to buy them. Near me whole new blocks of flats are sold to overseas investors before ever hitting the market here or built to rent straight away.

And we can't build on greenbelt land. its as much a supply problem as a problem of ultra low interest rates.

I don't think they build enough of the right homes eg too many "luxury" apartments, family homes that are too small & no homes that people want to downsize too.

95% LTVs are usually aimed at FTBs and those are the ones that might have the right salaries but struggle to get a deposit together.

@lolulop the land is too expensive in London (can only speak for london as that is where I bought) for them not to build luxury apartments. And they only seemed to build new builds in gentrifying areas with few good schools.

As I was looking at catchment areas and Dh wanted to live in the same area of north london he grew up in, i had to look at the resale market when buying. So could not use HTB even as a 2019 FTB and needed to save up 15% deposit.

It didn't used to be though. My parents bought in a very undesirable part of London in the 80s/90s when people preferred to live further out. It will be interesting to see if increased remote working/lockdowns have an impact on that.

Even my part of London which was desirable when we bought was affordable ish not that long ago (pre low rates).

huge swathes of south london were affordable. The vast majority of my peers had parents with normal jobs often with only 1 parent working that now you need to earn 150k plus to buy.

Personally if I was a FTB now I would future proof as much as possible which will depend on circumstances & location.

In my circumstances I would skip the flat stage & go straight to a house (my 2nd stage) a bit further out from my flat. We were going to move a few yrs ago to a slightly bigger house in the same area but stamp duty made it pointless so we extended. We will move in a few yrs for the last time but I'm less fussed about location now vs space so will go to zones 5-6.

@lolulop in my area though, you can't buy a house or even a 3 bed flat for 500k (its closer to a million for a terrrace) and I wanted to take advantage of the stamp duty exemption for FTB (as it is the only thing that I qualified for in 2019).Even in zone 5 high barnet, 500k isn't a great budget for a house, you can probably get something for £550k and I would really prefer to stay in zone 3 near family. So I went for the 400k 2 bed flat.

My plan now is for a 3 bed Edwardian maisonette with garden which is now selling for £650k in my area but would hopefully decrease in price or stay the same as people move out of london. Or perhaps a small terrace if WFH really kicks off. I am just concentrating on overpaying the mortgage so i can afford to move even if prices drop.

My MIL says that house price falls in the 90s is what enabled her to move from a 1 bed flat to her 3 bed house but that was only because she paid off a lot of the mortgage for the flat.

[quote onlychildandhamster]@Lightscribe i actualy think we are heading towards Japanification of the economy. I read an interesting paper the other day about how demographics (aging population) impact on interest rates. So a long period of stagnation, ultra low interest rates and practically no economic growth, lost generation of young people.

How this would impact on house prices? I don't know but I predict that the areas of the UK where people finance their homes primarily through income would be affected. The areas in London/SE where people finance their purchases through built equity/family wealth/inheritance and which are popular with foreign investors and newly arrived HKers would be less affected. Similar to how private school fees have outstripped any kind of wage growth in professional jobs since 2008.[/quote]
Japan went through this hyper asset bubble in the 80’s (remember generation mortgages?) The government bought up all the unwanted treasury bonds (keeping the yields from getting high causing and overshoot in inflation). This led to stagflation that has lasted generations. Now the younger demographic is reaping the ramifications of that, with the younger generation not benefiting from the economic environment the previous generation did. That then reflects in Japan’s current population decline by the younger generation being unable to afford to settle and start families etc.

The difference here is world-wide economic stimulus. The US $ is the worlds reserve currency. The stimulus is not bailing out banks like it did last time which went straight into asset bubbles.

This time it’s being injected directly into the economy through individual stimulus cheques and nationally in infrastructure spending and the transition away from fossil fuels into green energy. This in turn drives up the cost of inflation, materials, energy and transport costs (which is already happening). All that ends with the consumer paying much higher for everything i.e inflation in the wider economy.

What they did in Japan can’t be repeated across the whole world at the same time, especially in an inflation led global economic recession.

@Racquelscottish negative equity is a massive worry I agree.

I think getting on the housing ladder can be made less risky by

Getting the biggest/most flexible home you can afford
Staying as long as possible
Over paying the mortgage if you can afford it
NOT stretching yourself
Keeping other consumer debt low

We bought our house in 2007 at the absolute height of the market. I know people think it crashed in 2008 but even in 2007 we were at risk of being in negative equity.

We were in negative equity in 2008 for sure and at that point only on an interest only mortgage . However we've stuck at it, got through some hard times. Switched to a repayment mortgage as soon as we stopped paying for childcare (2015) and now have paid off £50,000 of mortgage debt and due to changes in the market now have about £100,000 of equity. Still a long way to go and recently remortgaged so have 23 years and 8 months to go.

We've managed to reduce our consumer debt and we could get a bigger mortgage and a bigger house with a decent deposit BUT we'll stay here and not risk that move.

I'd like a slightly bigger house, this is a bit of a squash and a squeeze just now (only one loo )

Best to stay where we are.

We only managed to get here due to a silly mortgage of 110% in 2002 and a more sensible one of 95% in 2004.

The global governments are aiming for 2% inflation (they need that level to inflate away the amount of debt that’s being created)
If long dated bond yields continue to rise then interest rates would need to rise and the Fed would look to start to tighten before the economy has even started to recover. That’s why they will be prepared to let inflation run even if it overshoots, and keep QE (money printing) the stimulus needed regardless of the amount already in circulation.
Rates will have to rise eventually and a pretty steep rate once enough liquidity is in the system to stave off hyperinflation. Whether or not the banks are lending at that point is another matter.

What this all means for house prices is that just 1% in a rate rise will mean a 20% drop by the BoE calculations. So even if interest rates went up to levels of a decade ago would result in a sharp decline in house prices.

www.bankofengland.co.uk/working-paper/2019/uk-house-prices-and-three-decades-of-decline-in-the-risk-free-real-interest-rate

Definitely agree that any FTB with a 95% mortgage should future proof themselves as much as possible. When house prices are rising rapidly and incomes are good and expected to rise, they can work very well for many people. However, at the moment, with an uncertain economic situation and interests at record low levels and likely to rise at some stage, people may find themselves very over leveraged.

@Lightscribe- do high yields on bonds in the US give a signal that inflation is likely? Is it all the QE that is likely to lead to inflation or the expected demand once lockdown ends? I guess both could have that effect. It sounds like a difficult balancing act.

Not to mention what the interest rate would be in a 95% mortgage. So even if you could borrow the £90k doesn’t mean you can afford the payments if reared are high. For interest I was just quoted for 85% LTV mortgage @ 1.89%, 90% LTV was 4.2% 😱

@Yellow85 our 95% mortgage is 4.84%, the payments are around £670 which is more than affordable for us. It's definitely a good option to buy family homes in cheaper parts of the UK

@1990shopefulftm I just couldn’t believe the difference in the rates. I don’t think I’ve ever seen them that much higher with a 5% ltv difference. Just don’t like the idea of people being shafted with high rate with an inciting low deposit scheme.

@Yellow85 if people use it to get a home that will last for years rather than a "starter" home it can work out, we got a 3 bed semi instead of a 2 bed terraced house as we were able to combine htb ISAs and a 5% deposit. We were 22 and 26 at the time though so got away with getting a 40 year term which I know isn't an option for lots of people.

The stamp duty holiday has increased prices by over 7%, these new prop up schemes the 5% deposit and stamp duty extension will just push up prices even further, the only people not benefitting are first time buyers as they will have to get themselves into more debt and borrow even more money where as homeowners will see their property's go up in value and will benefit massively. Complete wasted of tax payers money, let the market sort its self out stop the props!