The banking industry on Tuesday warned against irresponsible lending after Boris Johnson pledged to “turn generation rent into generation buy” through a big increase in low-deposit mortgages for first-time buyers.
The prime minister told the Conservative conference that the government “could create 2m more owner-occupiers” through long-term fixed-rate mortgages worth up to 95 per cent of a property’s value, but offered few details about his plans.
A government spokesperson could not confirm any details of the proposals such as whether the state would guarantee these higher risk mortgages or over what duration they would be repaid.
Eric Leenders, managing director of personal finance at banking trade body UK Finance, said the industry looked forward to working with government on its proposals. But he cautioned that “firms have a duty to lend responsibly and consider the affordability of the mortgage in the long term, helping customers to avoid the risks associated with negative equity”.
Executives at several lenders, speaking ahead of Mr Johnson’s conference speech, said the current scarcity of high loan-to-value mortgage deals was a reflection of the economic downturn unleashed by the coronavirus crisis and would not be changed by government intervention.
One said that for most of the banking industry it was too early to increase the number of these deals, and highlighted forecasts for falling house prices.
The number of mortgage deals worth at least 90 per cent of a property’s value fell 93 per cent between September 2019 and last month, according to Moneyfacts, a financial website.
About 400 mortgage products that required a deposit of 5 per cent existed prior to the start of the coronavirus lockdown in March. All but a handful have now been withdrawn by lenders.
While the details of Mr Johnson’s plans have yet to be unveiled, one option that has been discussed by Treasury officials, bankers said, is reviving a former aspect of the government’s Help to Buy scheme that assists first-time buyers with home purchases.
This aspect, called the mortgage guarantee and used between 2013 and 2016, compensated lenders for a portion of their losses in the event of customer defaults.
One senior figure at a high street bank said: “Clearly that would help with some risk mitigation [for lenders], but it still doesn’t deal with the negative equity risks for customers.”
The Daily Telegraph, which first reported on Mr Johnson’s plans for low-deposit mortgages, noted these changes could involve the government making it easier for banks to approve loans by tearing up affordability criteria that were introduced by regulators after the financial crisis.
However, any scrapping of the criteria would require action by the Bank of England and the Financial Conduct Authority.
In a speech last year, Jon Cunliffe, BoE deputy governor for financial stability, said the affordability measures had successfully “restrained the build-up of more highly indebted households that would otherwise leave the economy and subsequently the financial system more vulnerable in a downturn”.
The FCA does not place limitations on loan-to-value ratios, and focuses on the affordability of mortgage repayments rather than deposits, said a person familiar with the regulator’s stance.
Henry Pryor, an independent property buying agent, raised concerns that the main beneficiaries of Mr Johnson’s plans would be housebuilders.
“Will it help first-time buyers?” he said. “No. Will it make what they’re trying to buy more expensive? Yes. This announcement will make no difference to the number of homes built, but it will make a difference to the bonuses of the housebuilder bosses.”
Shares in the UK’s big three housebuilders — Taylor Wimpey, Barratt Developments and Persimmon — have risen about 5 per cent since the Telegraph report.