New 95% LTV state-backed mortgages: Why lenders are concerned?

Summary

• UK Prime Minister Boris Johnson has reiterated the notion of low-deposit mortgages under which he has promised to create as much as two million new owners
• PM has promised to fix the broken housing market, offering the homebuyers and borrowers a chance to obtain a long-term credit line of up to 95 per cent of the property value
• Under the newly proposed scheme of low-deposit state-backed mortgages, the government is likely to underwrite a proportionate part of the loan to the borrowers

Buying a property has been one of the major things in the to-do lists of individuals, but when it comes to financing the property, a large section of people approach housing financiers, lenders and other financial institutions dealing with mortgage loans to cover a portion of the house price they are interested in. The decision to purchase a residential home or a related property becomes quite hard, especially for the first-time buyers, as well as all the middle-income earners and daily wage workers.

PM Johnson’s State-Backed Mortgages

Recently, UK Prime Minister Boris Johnson has reiterated the notion of low-deposit mortgages under which he has promised to create as much as two million new owners. Under the new state-backed low-deposit mortgages, a likelihood of various higher LTV mortgages can be seen in the near future with the housing financiers and lenders extending a credit line of up to 95 per cent of the property value.

The latest announcement by PM Johnson has also muddled the lenders as the said move could help in multiplying their assets, but, on the other hand, a low-deposit mortgage could be an equally adverse situation if the housing prices began to stabilise at a faster-than-expected rate.

PM Johnson has promised to fix the broken housing market, offering the homebuyers and borrowers a chance to obtain a long-term credit line for financing their respective requirements while purchasing the house, that too on a fixed-rate mortgage. Interestingly, the value of fixed-rate mortgages can go up to 95 per cent of the property value. This could lead to a rush of borrowers as the size of deposits on mortgages designed to offer 95 per cent of the property value is way less.

According to the Prime Minister, the proposed structure of 95 per cent loan-to-value mortgages can be the biggest expansion of home ownership since the 1980s. Though the PM did not ccme up with the details of promise in terms of how the proposal of low-deposit or higher LTV mortgages would be attained. Most of the lenders have received this announcement as more of a help-to-buy scheme as the low-deposit mortgages have nearly vanished of late.

Higher LTV Mortgages

Mortgage loans are one of the oldest forms of credit facilities being offered with the largest market share among all other credit lines extended by banks and financial institutions including a vehicle loan, education loan, personal loans, gold loans and other related credit services. Higher loan-to-value (LTV) mortgages have been primarily designed to address the requirements of first-time buyers and other interested parties with low incomes. Most of the banks and housing financiers are readily available to extend a credit line of up to 70-80 per cent of the property value.

Roller-Coaster Real Estate

The low-deposit mortgages are one of the credit services that attract a huge number of customers; however, the financial institutions have retraced themselves from offering the low-deposit mortgages in the present calendar year following the abrupt consequences of the coronavirus pandemic.

The real estate market in the United Kingdom has seen quite a turbulent time in this year so far with the demand for larger houses growing with the lockdowns beginning to ease. It’s worth mentioning that earlier in 2012, the then Prime Minister David Cameron had also announced that the low-deposit borrowers would be allowed to get the loans with up to a 95 per cent value of the property.

Concerns Around Low-Deposit Mortgages

The practice of low-deposit mortgages has been prevailing in the last few years, the interest of lenders and borrowers took a hit with the widespread aftermath of Covid-19 on businesses, as well as earning potential of people. With the ongoing subduedness amidst the markets, the lenders and financial entities dealing in mortgages have become stricter and observant on the credit lines extended to individuals.

A step beyond conventional investigations about the background and affordability of the customer has been carried out these days. The dejected intentions of the lenders along with the rising house prices to record levels, seemed to have deferred the plan of purchasing a house of a wide group of first-time buyers.

Worried Lenders

Under the newly-proposed scheme of low-deposit state-backed mortgages, the government is likely to underwrite a proportionate part of the loan to the borrowers. With this structure, the government is intended to lessen the burden of the borrower, as well as the lenders. Still, the lenders and financiers are surprised by the housing price surge even after the Bank of England reduced the interest rates to multi-decade lows.

Banks could not promote the recent announcement made by PM Johnson as most of the lenders have an extensive disquiet that they might lose money if the unemployment rises in the near future. However, a short-term disruption in the inflow of money wouldn’t take a toll on the financials of huge lenders as the promises made by the PM are meant for long-term, could be any period for more than 10-15 years.

Among the various risks the low-deposit mortgages possess amidst the present market structure, include a further price rise in the residential houses and other real estate assets as there could be a storming demand of homes once this scheme gets a formal and structural go ahead. More clarity on this scheme after further disclosures from the government’s end can give a better estimation for the lenders, whether they are going to gain with the scheme or not.