Return of 95% Mortgages?

Following Boris's comments at the Conservative Party Conference, could we see a return of 95% Mortgages in the United Kingdom?

Today Boris Johnson made an announcement at the Conservative Party Conference that has got some first-time buyers very excited.

In today's speech, Boris spoke about his desire to create two million more homeowners in the UK. One of the ways that he mentioned that this was going to be possible was with the return of low deposit mortgages. He specifically made reference to ‘going up to 95%’ of the property value.

As a result of the Covid Pandemic and understandably because of the uncertainty about the future of the housing market and the fragility of the economy, a lot of lenders removed or limited their low deposit mortgage ranges. Therefore, currently to be able to buy a property, you may need to put down more of a deposit then you would have done before the Covid Pandemic with everything else being equal. However, in Boris's speech, he talked about the ability to put down smaller deposits which has got a lot of first-time buyers excited .

One of the biggest obstacles of purchasing a property in the UK is the time it takes to save for a deposit. Your funds plus the mortgage from the bank allow you to be able to purchase the property. With the return of low deposit mortgages, ultimately, that would mean that the lender would assume greater risk. So, let's say hypothetically I'm a mortgage lender and I lend 95% of the property value and the client themselves puts in 5%. And, let's say in the future the property market turns and prices start going downwards. If the value of that property goes down by over 5% the property is going to be in a situation of negative equity i.e. the value of the property is going to be less than the value of the debt outstanding on it. That's not a good place to be and that's definitely not a position that any lender wants to be in.

At present, we are seeing a lot of activity and this has come from mainly two key factors. Number one is because of pent up demand during the Covid lockdown that's now been released onto the market. Number two is Rishi Sunak’s Stamp Duty Holiday which means that there's the potential to save money on stamp Duty land tax for residential transactions that conclude before the 31st of March 2021. Now because of this, that has put a lot of pressure on lenders and lenders generally are struggling to cope with the demand for their services. From their perspective as well, a lot of them are having to comply with the social distance rules and regulations, a lot of their staff maybe working from home, generally, it is taking a lot longer to process a mortgage application than it previously would have done. So in those scenarios, what do people do? Well there's one way to curb the amount of business a lender receives and that's either to change their criteria or to alter their rates. But, some lenders are finding that even if they increase their rates at the moment to curb the amount of new business coming through the doors they are still getting a similar amount of business coming through. So how does a 95 percent mortgage and Boris's comments feed into the current environment? I personally cannot see how that would happen at the moment with where we are and against the current economic backdrop. I certainly can't see Banks agreeing to that themselves and carrying the risk on their own books so to speak without some form of government support or guarantee. But, the devil is in the detail like everything. At the moment we don't have that detail. So although the announcement has been made, until the mechanics are revealed, It's going to be very difficult to see how that's actually going to transpire in the mortgage market. Therefore if I was a first-time buyer, and I heard the announcement today, I wouldn't expect that to be in place anytime soon. I could be wrong, but I just can't see it with where we are at present.

This article is for general information purposes only and does not constitute advice. The author does not accept liability of any errors of omissions. Readers are recommended to take professional advice from a suitably qualified professional regarding their own personal circumstances.