1. Governance
September 21, 2016

The case for government-backed 100% mortgages

By Liam Booth-Smith

“What ransom will property pay for the security it enjoys?” the Victorian liberal reformer Joseph Chamberlain once asked. When Birmingham’s man of municipal renaissance, reportedly much admired by the PM’s co-Chief of Staff Nick Timothy, posed this question at the height of his political popularity in 1885, he was raising issues of equity and housing. One hundred and thirty one years later, they remain as politically salient as ever.

For many in Britain, the housing ladder has been pulled up, and a whole generation is being locked out of the housing market. In 1991, 67 per cent of 25-34 year olds owned their home. In 2014 the equivalent figure was 36 per cent.

In large part that’s because, as house prices have risen, so have mortgage deposit contributions: the average deposit for first-time buyers has more than doubled ovee the last two decades. Lending criteria were severely tightened after the 2008-09 financial crash, meaning many mortgage products were withdrawn from the market; and favourable loan to value ratios (how much you can borrow based on your income and expenditure) went with them.

So to paraphrase old Joe Chamberlain, the question surely now must be: “What ransom will we pay to enjoy the security of property?”

For those unable to rely on the bank of mum and dad, few answers are forthcoming. People want to own their own home – given the choice to rent or buy a home, 86 per cent of British people would buy – and moreover many can comfortably afford a mortgage. But for the majority, deposits of £30,000 and more are a lifetime’s savings away.

At a recent Localis event, Kingston upon Thames leader Kevin Davies called it correctly when he said “affordable housing in London is a myth”. If we want people to get on the housing ladder in the capital and surrounding areas (and in other parts of the UK too), then we’re going to have to be radical in how we go about it.

Last week Localis offered an answer to this conundrum; bring back 100 per cent mortgages backed by a government Deposit Guarantee scheme. The premise is simple: government should provide, up to a fixed price, 10 per cent of a property value, to be held by the lender in a secure account for the length of time it takes the borrower to pay that amount back in mortgage payments. At that point, the government reclaims the 10 per cent it put down in full.

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Despite the criticism that 100 per cent mortgages have received in the past, this would be a low risk venture for government to undertake. Such mortgages are not risky in of themselves: they are merely products. The risk lies with the borrower. Maintaining strict lending criteria would ensure that no one who couldn’t afford a mortgage would receive one.

Secondly, the principles upon which this proposal is based have already been established. Government already provides direct cash support for first time buyer deposits with its Help to Buy scheme. But our scheme would be an improvement on this, because it would allow government to recoup its money faster. The market too has signaled that now might be time for a rethink, with Barclays offering a 100 per cent product , but only to people with wealthy enough parents to stump up the security deposit.

Government could step in and directly help an entire generation achieve something special whilst getting its money back in return. We calculated that, if 100,000 people took advantage of the Deposit Guarantee scheme, based on currently repossession rates – and making the ultra-conservative assumption that every repossession would be one of these deposit guarantee first time buyers – on a £1.8bn investment the government’s risk would be approximately £4.5m, less than 0.5 per cent. 

Last week’s supposed policy shift away from mass home ownership towards renting was welcomed by investors and funds, no doubt eyeing up the stable long term income streams from large build to let developments. But while dysfunctional housing markets like London’s do need a greater mix of tenures, ultimately people will still crave the type of stability only owning your own home provides.

Our last female Prime Minister defined her legacy by helping a generation of British people realise the dream of owning their own home. If Theresa May is looking to make policy understandable and meaningful to people’s everyday lives, she could do a lot worse than turn Generation Rent into the next big wave of British homeowners.

Liam Booth-Smith is chief executive of the think tank Localis.

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