The Government has outlined plans for a new mortgage scheme called ‘Generation Buy’ to increase the number of mortgages available at 95% Loan to value (LTV).
Prime Minister, Boris Johnson has asked ministers to design a plan to remove stress tests for mortgage applicants and replace it with extending a form of state backed guarantee for mortgage lenders to de-risk the loans.
What is an affordability stress test?
After the credit crunch crisis of 2008/09 where banks collapsed due to toxic loan and mortgage debt i.e. they were simply lending money that people could not afford to pay in difficult times. The Financial Conduct Authority (FCA) conducted a Mortgage Market Review (MMR) which subsequently required mortgage applications to be stress tested. This means not just checking that you have the means and can afford to pay the mortgage today but also if interest rates went up by say 1% or 2%pa, could you still afford the mortgage repayments.
Mr Johnson wants to take the risk away from lenders when offering high loan to value mortgages. He wants to help more people get on the property ladder even if they have a very small deposit and said: “It is vital for our society to offer the huge amount of people that are currently excluded from capitalism and this could be revolutionary particularly for young people”.
This is so similar to other schemes before such as the old mortgage indemnity insurance guarantees in the 1980's and indeed the help to buy scheme more recently. We suggest the Government simply wants to stimulate the property market, get people on the ladder which then pushes other people up the ladder. This will help keep the property economy ticking over as well as reducing the risk for mortgage lenders in these troubled times. In directly, it may also protect the government having paid out millions in loan deposits in the Help to Buy market where the government technically has a 20% stake in the value of properties bought using the help to buy scheme.