Generation Buy is the name that has been given to a proposal by Prime Minister Boris Johnson, made at the recent Conservative Party Conference, to provide 95% fixed rate, long term mortgages to first time buyers. In this post, we will look more closely at what the Generation Buy proposals are, and what they might mean.
First, what’s the background to Generation Buy?
Rising house prices mean that affordability has become a major issue in the housing market – and so a hot political issue – in recent years. It has been a particularly hot issue in regards to first-time buyers. Finding a property they can afford to buy has not just become difficult but literally impossible for first-time buyers in many parts of the country.
Generation Rent is a term that is sometimes used to describe those first time buyers who would like to buy but who are ‘stuck’ in the rental market because they cannot afford to. Speaking at the Conservative virtual party conference the Prime Minister said that he wanted to turn Generation Rent into Generation Buy. The policy seems to be an attempt to deal with the Generation Rent ‘problem’. (And potentially gain the favour of the young voters as well as perhaps their parents.)
This wasn’t a totally new announcement, however. The policy was first announced in the Conservative Party manifesto prior to the 2019 General Election.
How will Generation Buy work?
So far no specific details have been released on how the scheme will be set up and run. However, the proposals broadly seem intended to make long term, fixed-rate mortgages available to first-time buyers at up to 95% LTV (loan to value).
While 95% LTV mortgages (and higher) have been readily available in the past the maximum LTV buyers can currently obtain, to get competitive rates, is around 85%. The maximum term is only 25 years while the maximum fixed mortgages are only for 10 years – and even then these are at premium interest rates.
It seems likely that the mortgages would be backed by the Government but available through banks and building societies. Lenders would probably have to agree to relax their lending criteria (which was tightened up by the Government after the 2008 financial crisis) in order to offer the loans.
The aim, according to Boris Johnson, is to create two million more owner-occupiers.
What could Generation Buy mean for the property market?
Without any specifics on how the scheme might operate it is difficult to say. But let’s try and look at a few possibilities.
Will it make any difference? It’s important to consider that 95% of mortgages might not be of much use to first-time buyers in any event. For example, a buyer buying a property at the average London price around £450,000 would still need a £22,500 deposit and the repayments on the 95% balance of £427,500 could still be well beyond their means.
It’s true to say that a long term fixed-rate mortgage at today’s ultra-low interest rates could be very tempting. However there have been attempts to encourage long term fixed-rate mortgages in the past, but neither lenders nor borrowers proved very enthusiastic about them. Long term mortgages won’t necessarily be offered at the best rates either.
If the Generation Buy mortgages are unaffordable then lenders might be very reluctant to get involved, even if the Government underwrites them. Several experts expect property prices to fall in 2021, which could be an added complication. Rising unemployment could also make lenders more reluctant to lend.
Possible impact on prices: If the new mortgages are taken out in numbers then they could stimulate the housing market and push prices up for everyone, so making it harder not easier for first-time buyers to buy. Bear in mind that recent Government measures in the housing market, such as Help to Buy and the Stamp Duty holiday, have most likely had this effect.
If demand for homes to buy rises as a result there might not be enough property to satisfy demand. Two million new owner-occupiers will need two million properties! New build developers can only find land for, get planning consent for, finance and physically build so many houses.
Possible impact on the rental market: Looking at the possible impact on the rental market it is possible Generation Buy mortgages could reduce demand in the letting market – by up to two million households – creating problems for buy to let landlords and investors. It could be an attractive exit route for investors who want to sell their properties, however. Then again it could cause problems for people who need or prefer to rent rather than buy, including people who still cannot afford to buy. These people could be faced with less choice of property and possibly higher rents.
At the end of the day, it is important to remember this – the new Generation Buy mortgages might not happen. Currently, they are still only a proposal. And a lot can happen between now and their launch, whenever that might be.
Whatever happens, it is worth bearing in mind that if Generation Buy mortgages are introduced their impact on the property market could be much wider than just helping more first time buyers to buy their own home.