Banks are resisting government pressure to rush back into riskier areas of the UK mortgage market, in spite of Boris Johnson’s call for a “revolution” in home ownership.
The prime minister told the Conservative conference on Tuesday that there could be 2m more homeowners through a big increase in long-term, fixed-rate mortgages involving low deposits for first-time buyers.
However, while banks are cautiously planning to increase lending in the next few months, they are unlikely to offer many of the 95 per cent loan-to-value deals sought by Mr Johnson, according to executives at several of the country’s largest banks.
The executives said they were concerned about a bleak economic outlook involving rising unemployment, the practical challenges of dealing with struggling customers during the coronavirus crisis, and rising regulatory costs.
“We don’t want to be part of the problem for the future,” said a senior executive at one high street lender. “People won’t thank us in 12 months time if they are saddled with unsustainable debt on their homes.”
Treasury officials privately raised concerns about a lack of lending to first-time buyers at a meeting with senior bankers last week, according to attendees.
The number of banks willing to lend at least 90 per cent of the value of a property has fallen by more than 90 per cent since March, when the UK went into lockdown, and the few companies remaining in the market are charging higher interest rates to compensate them for the risks.
Lloyds, the country’s largest mortgage lender, told the Financial Times it was “monitoring the market in order to confirm when” to reintroduce 90 per cent plus loan-to-value mortgage offers.
HSBC, the only one of the “big four” high street banks to carry on issuing 90 per cent mortgages at the height of the crisis, pulled the offer for new borrowers last month after being overwhelmed by demand.
But it has given the government a date for when it plans to restart these offers, said a person familiar with its plans.
Still, banks will remain cautious about the volume of business they are willing to write. Before withdrawing its 90 per cent mortgages, HSBC frequently hit its daily quota for new applications before 9am, brokers said.
Most banks predict house prices will ultimately decline in 2020 and only recover slowly, if at all, over the next two years. A sharp decline could leave borrowers with small deposits owing more money than their house is worth, making it difficult to remortgage at the end of their fixed term and potentially creating a new generation of “mortgage prisoners”.
When house prices crashed in the early 1990s, banks were left with tens of thousands of repossessed homes they were forced to sell at a loss after borrowers were unable to keep up with mortgage repayments.
Stricter affordability tests mean bankers today are less worried about a repeat of that crisis, but more recent affairs such as the £54bn payment protection insurance mis-selling scandal have raised the possibility of banks having to pay compensation if customers become stuck in negative equity and accuse them of having lent recklessly.
“You have to think about conduct risk,” said a senior executive at a leading bank. “If we re-enter back into the 90 per cent market, one of the most important things is to make sure that we say [to customers] ‘there is greater risk and therefore please be careful’.”
House prices have held up better than many economists expected this year, partly because of the government’s stamp duty holiday that took effect in July. Mortgage approvals hit a 13-year high in August and the Nationwide house price index rose 5 per cent year-on-year in September.
Banks are reviewing their internal estimates for the future trajectory of house prices ahead of reporting third-quarter results at the end of this month.
One executive said forecasts for a “shallower” dip in prices would make it easier returning to the high loan-to-value market, but there are still significant uncertainties about rising unemployment and the end of the stamp duty holiday in March.
Mark Mullen, chief executive of digital-only lender Atom Bank, said it was “just too early to call” whether the recent strength in prices would last.
Meanwhile, banks are grappling with more prosaic short-term issues, including a lack of staff to deal with the volume of incoming mortgage business. HSBC blamed its temporary withdrawal of 90 per cent mortgages on a backlog of applications.
Lenders are also contending with exceptionally high demand for loans from less-risky home movers, as well as dealing with existing customers who took advantage of mortgage payment holidays introduced at the start of the crisis. “Mortgages are a mob right now,” said one HSBC executive.
But new rules proposed by the Bank of England last week will make many types of home loans less profitable for the big banks by forcing them to hold more capital for every mortgage they write.
Large lenders have leeway to determine how much capital they need to protect against losses, but the central bank said it was concerned that some were applying “inappropriately low” risk weightings, which gave them an unfair advantage over smaller rivals.
One executive who spoke to Treasury officials last week said the timing of the BoE’s announcement highlighted a lack of joined-up thinking between regulators and the government. “[The BoE regulation] is hardly going to give the market a boost,” added the executive.