History repeating itself?

by | Oct 19, 2020

There was a round of fresh political housing crisis rhetoric this week, as Boris talked about relaxing lending criteria and re-introducing 95% mortgages to help first time buyers. Problem solved!

While first time buyers need all the help they can get with the astronomical cost of housing, increasing demand yet further may not be the sensible.

Homeownership, the bedrock for financial prosperity, comes at a cost…a cost that becomes substantially greater with a 95% mortgage. Back of the envelope calculations here, assuming the average cost of a UK home (per July 2020 Land Registry) is £237,963 then a standard 25-year repayment mortgage at 3.5:

LTV Total Mortgage Monthly Repayments Total Cost 
80% 190,370 953 286,010
90% 214,166 1,093 321,761
95% 225,808 1,131 339,250


The 95% LTV mortgage might put home ownership within the reach of those with affordability issues, but at the cost of increased household debt. When compared to a more typical 80% mortgage, we’re looking at an extra £180 per month on the repayments – not an insignificant sum for the average household take home of £1,980 per month.

The standard solution of government to housing affordability is to subsidise demand. And it never works. The supply side – developers and landlords – make money from increasing, not decreasing prices, so increased credit and hence increased demand is only going to have one effect on prices. 

Of course, 95% LTV mortgages have existed before. Pre the financial crises starting in 2007. They led to a housing bubble which played its significant role in the economic collapse that followed. As a consequence, lending controls were greatly tightened, and 95% LTV mortgages were phased out. Lesson learnt? Apparently not.

In the midst of bad news Covid and Brexit all around, the government wants to appear to be proactive and supportive. The property market in the UK cannot be allowed to soften, and it seems like every effort will be made to keep it moving in the right direction.

But while every man’s home is his castle, the issue is that not every man can afford a castle and would be better off renting until he/she could.


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