UK Edition
First-time buyers will be given easier access to low-deposit mortgages under a package of new housing measures announced by Prime Minister Boris Johnson.
The Government will launch a review of the mortgage market to find new ways to make it easier for first-time buyers to take out loans and improve access to low-deposit lending, Mr Johnson said.
He also confirmed an extension to the Right to Buy scheme to allow housing association tenants to buy their homes at a discount and plans to let low-income renters use their housing benefit payments towards getting a mortgage.
The mortgage market review will be led by an independent chair, supported by officials from the Treasury and the Housing department and will conclude in the autumn. A separate Bank of England review is looking at loosening mortgage affordability tests introduced after the financial crisis. At present borrowers must prove they can afford a mortgage at today's rates and if the cost were significantly higher.
However, experts warned it was a dangerous time to open up the market to higher risk borrowers, given rising prices and deteriorating consumer finances.
Lewis Shaw, of Shaw Financial Services, a mortgage broker, said: “It’s a terrible idea and is asking for trouble, given the economic state of play.”
The cost-of-living crisis, falling disposable incomes, high inflation and rising interest rates mean that buyers purchasing with 5pc deposits will be particularly vulnerable to falling house prices and the risks of a recession, said Mr Shaw.
UK Finance, the financial trade body, said it was not provided with any detail on what the review would include ahead of Mr Johnson’s announcement.
Neal Hudson, of BuiltPlace analysts, said: “Historically, people losing their homes to repossessions is closely correlated to high loan-to-value lending.”
“The smaller your deposit, and the more recently you bought, the greater the chance of falling into negative equity,” said Mr Hudson. This means a person’s home is worth less than they borrowed to pay for it.
If an owner has to sell while they are in negative equity, they will have to pay the difference in value to their bank.
Mr Hudson added: “There is a real risk in a weakening economic environment, with the threat of a recession and rising unemployment, that these people will be forced to sell. And anyone purchasing with a small deposit is already more likely to be a first-time buyer, to be younger, and to have other debts, such as student loans.”
Low-deposit lending, to buyers with deposits of only 5pc or 10pc, has bounced back since banks pulled these mortgages en masse during the pandemic, but the levels are still well below those seen before the global financial crisis in 2008.
Measures to open up this market could include mandating cheaper rates for low-deposit mortgages, or expanding the government-backed insurance policy that is in place for the existing mortgage guarantee scheme, said Mr Hudson.
Charles Roe, of UK Finance, said: “Firms are committed to lending responsibly, with regulatory rules in place to ensure that mortgages are affordable – it will be important to carefully consider any changes to ensure they deliver good outcomes for customers throughout the life of the mortgage.”
What is the new Right to Buy scheme and when will it start?
Mr Johnson has announced plans to extend the Right to Buy scheme to the 2.5 million people who live in properties owned by housing associations.
This will allow them to buy their homes at discounts of up to 70pc off market rates, depending on how long they have been living in their homes.
The scheme will be brought forward “in the coming months”, Mr Johnson said.
How will the Right to Buy scheme actually work?
Experts are cautious about their expectations of what the new Right to Buy scheme will look like in practice.
Housing associations are private entities, but they are non-profit organisations. They are not able to fund large discounts themselves. The Government has also announced that for every property sold, a new one will be built. If homes are sold at a discount, the housing associations will also need further cash to be able to build new ones.
If there were no limits on how many people could use the scheme, hundreds of thousands of housing association tenants could buy every year. Internal government estimates put the cost of an uncapped scheme at £3bn per year. Yet so far, there are no plans to allocate additional government funding to these policies.
This means that in reality the actual impact will likely be small, and limited to a small selection of pilot schemes.
What will happen to the social housing supply?
Under the original Right to Buy scheme launched by Margaret Thatcher, social housing homes were not built at anything close to the rate at which they were sold. Less than one in five council homes were replaced.
The Government has said that every housing association property that is bought will be replaced, but it is not clear how this will be funded.
How will housing benefits fund home purchases?
The Government plans to change welfare rules so that the 1.5 million people who receive housing benefits can choose to use this money towards a mortgage.
It will also explore discounting Lifetime and Help to Buy Isa savings from universal credit eligibility calculations.
The Government said more detail would be announced in due course.