Will Return of 95% Mortgages Boost UK Homebuilders?

British homebuilders and mortgage lenders are considering making it easier for first-time buyers to get the 95 percent mortgages which many believe contributed to the credit crisis, in a move that risks sparking a wave of criticism.

Construction worker in New York City.
Oliver Quillia for CNBC.com
Construction worker in New York City.

The country’s biggest house builders, including Taylor Wimpey, Barratt and Persimmon, met the Council of Mortgage Lenders (CML), the industry body for mortgage lenders, last week to talk about making it easier for first-time buyers to borrow, The Times reported.

There are fears in the UK, where house ownership is viewed as extremely important, that an entire generation is giving up on buying a home.

On Tuesday, a study by Halifax, one of the country’s biggest mortgage lenders, found that 64 per cent of 20 to 45-year-olds believed that they would never own a home, mainly because of the difficulty of saving up for a deposit.

Insolvencies in the British construction sector surged in the first quarter, signaling that it was being hit hard by government cuts, the first time insolvencies in the sector have risen in two years.

So, might the return of 95 per cent mortgages be the boost the sector needs? There are plenty of skeptics.


“It’s not a good idea," Gerard Lyons, chief economist and group head of global research at Standard Chartered, told CNBC.com.

“We need to look at the implications of this. We need a bit more strategic thinking in the UK over the whole issue of housing and the rental markets. In terms of any one organization lending, of course it’s up to them," Lyons said.

The Institute for Public Policy Research, an influential British think-tank, called for mortgages to be no more than 90 per cent of a property’s value and 3.5 times household income on Tuesday.

Focus on Rents

The UK had the highest loan-to-value ratios of any OECD country other than the Netherlands before the credit crisis started. There should be more focus in the UK on changing the rental market, according to Lyons.

“If there’s no strategic thinking about the rental market, people will end up paying extremely high rents for very little in return," he warned. “On the Continent, some countries get the balance right with a buying market but relatively low rents."

“The underlying problem is that there’s a lack of thinking,” Lyons added.

If the property market is boosted again, the UK will remain locked in a cycle of boom and bust, he said.

“Every UK boom and subsequent bust has been associated with relatively lax monetary policy and a housing market boom that became a bust," Lyons said. “We need to overcome the idea that the only way to get rich is to buy a property and to overcome the idea that property prices are a one-way street.”

Lyons argues that the UK needs to be more focused on regions outside the South-East and London, where property prices have remained relatively buoyant as unemployment has stayed low compared to the rest of the country.

“There’s greater internal and external migration in the South-East and we need to think about that,” Lyons said. “We need spending on infrastructure within strategic regions, and we have to get people wanting to work in different parts of the country.”