Michael Gove, Secretary of State for Levelling Up and Housing has proposed a new deposit insurance guarantee scheme to make first time buyers and other low deposit, high loan to value mortgage applications easier.
House prices have again hit record highs and with the average house price in UK at £300,000, this means the usual deposit of 25% required by lenders means many younger people have little or no chance of saving a deposit of up to £75,000 to get ‘on the ladder’.
The Problem with Lending
The Credit Crunch Crisis of 2008 resulting in many banks and mortgage lenders collapsing due to ‘toxic debt’ resulting in the UK having a Mortgage Market Review (MMR). Never again should lenders be allowed to put themselves at risk by offering low deposit, large loans and higher risk lending. The result of the MMR was a new requirement for banks to maintain and report capital adequacy as well as only offering mortgages to borrowers that are Suitable and Affordable.
Suitability and affordability tests not only resulted in larger deposits being required but also mortgage applicants being tested to not only be able to afford the mortgage payments today but also with a stress test on affordability if interest rates increased resulting in much lower numbers of younger property owners.
Mr Gove sighted the Canadian Mortgage insurance scheme for deposits of lower than 20% i.e., mortgage loan to values over 80%. In these circumstances, mortgage deposit insurance is required. The insurance is underwritten by Canada Mortgage Housing Corporation (backed by the Canadian government) and two other private insurers.
Look familiar? Of course, it is. This is exactly what the Mortgage Indemnity Guarantee (MIG) scheme did in the 1980s and 1990s.
The UK had various MIG schemes in the 80s and 90s. These were underwritten by large insurers. Many Banks and Building Societies used these schemes to enable offering 95% and 100% loan to value mortgages. The insurance policy protected the mortgage lender against default, but the borrower paid the insurance premiums.
When borrowers got into difficulty or indeed ended up in negative equity when property prices fell in the early 90s, some had their homes repossessed and other borrowers simply handed back the keys. The meant that many lenders then sold the ‘distressed’ properties at a loss and claimed on their MIG policy.
Problems with MIG
Lenders are insured, the borrower is not although many thought they were. One of the owners of this business did work for a period in the 1980s in the MIG insurance and claims department of a major UK insurer. Insurance claims were processed and paid out to lenders that had suffered financial losses. The insurance claim handler then had to attempt to recover the financial loss from the ‘proximate cause’ of the financial loss i.e., the borrower. Imagine, you have just lost your home and then you get a letter in the post from an insurance company advising you that owe them £10,000+ as you were the cause of the loss. It was devastating for thousands of people.
Mortgage Deposit Insurance Option Needed
We recognise the government’s desire to help younger people onto the property ladder but using mortgage deposit or MIG insurance is not in our opinion the right route unless the insurance policy also includes an option for the borrower to protect them from losses too.