The array of schemes offered by the government was always going to impact the housing market; their whole creation was to inject that much needed boost into a stagnant market. However while some of the banks may have been on board from the start, those dragging their feet may have had a rather different opinion and had to have a complete overhaul in their mortgage strategy as a result.
After the property market crashed in dramatic fashion in 2007, the banks pretty much shut up shop and refused to lend any money to anyone at all. If you were a first time buyer, you had next to no hope of ever getting a mortgage. If you were one of the lucky ones, your deposit was going to have to be sky high to be able to borrow anywhere near what you needed.
Understandably, with household names like Bradford & Bingley and RBS falling foul of the financial crisis and needing government bailouts, the stronger banks were reluctant to take any unnecessary risks. This inevitably fed into the property market; with a reduction in lending came a struggle for house sales. Yet again, the government was turned to in the hope of providing a solution.
Unlimited pot of cash
The government-backed schemes looked brilliant on paper; act as a guarantor for some of the cost, take the pressure off the banks and get people into the housing market again. However, the pot of money put aside to guarantee these loans isn't found at the end of the rainbow. At some point, it's going to run out and where does that leave the lenders?
While there are of course people who can make good on their payments, there will still be those who cannot. The government only has so much cash it can pour into the lending schemes, so what happens when that cash pot finally runs out? With a country living in austerity, cuts are being made wherever possible, as the economy hauls itself back to its feet again. Surely, pumping more cash into a struggling housing market is going to cause it to overheat and, sooner or later, boil over once again, leaving the lenders out of pocket, struggling and putting on tighter restrictions than ever before?
Of course the banks are, for the most part, privately owned so if the government does run out of cash and the schemes backfire, the responsibility will lie with the government. From a government perspective, the buyers will be able to afford their repayments. Meanwhile, the lenders are given the reassurance that they will get their money. They have their much-needed security net.
The original plan was to get the market moving and once it had revived itself, the government could take a step back and let things take care of themselves once again. However, with a bubble seeming to loom again, will the interest rates climb back up and leave homeowners struggling to keep up with their repayments? While the government, lenders and homeowners don't want history to repeat itself, if the property buying schemes do create a false economy, it's only a matter of time before the whole thing collapses in on itself. The lenders are currently looking at minimal risk, as the brunt of a second market collapse will fall on the shoulders of government and prospective homeowners.
As the buying market remains a difficult prospect to enter for many would-be homeowners, the prospect of renting seems much more viable for this group. The flexibility to live where you like is still a big factor for many renters as well as freedom from the shackles of responsibility and long-term commitment. Renters are not tied to monthly repayments on a big loan and cannot fall into negative equity as a result of shifting housing market conditions.
As renters are not utilising the government’s Help to Buy equity loan scheme, they do not have to repay a percentage of the property’s market value equal to the percentage contribution of assistance from the government if they wish to leave the property.
Essentially, renting provides much less risk in an era plagued by volatility.
However, the key thing to remember is that the government-backed schemes need to be looked at on a long-term basis as well as the immediate solution they provide. The banks may be happy to get involved – and many more have actually signed up to the schemes over time – but the risk for them is now reduced significantly; the government has provided them with a back-up plan.
On the other hand, this back-up plan involves burdening the government and homeowners with risk. Alternatively, it is much easier to rent a property at the moment and tenants don’t have to worry about paying any remuneration to the government when looking to leave the property at the end of a tenancy.
Should the bubble become real and then burst, the banks are likely to want to shut up shop and next time around, they will have learnt their lesson. It could result in them pulling out of government-backed schemes, instead preferring to lend entirely on their own terms. House buyers may find themselves left with no option but to simply keep saving until they can finally raise the percentage needed for a deposit. The days of 100 per cent mortgages are long gone and with increasing talk of another false start in the market, could the days of the 95 per cent mortgage be well and truly numbered? Only time will tell.
For more information on the property and letting industry please visit UK multi-award winning letting agent Intire
By: Ash Curtis | Brand Journalist
Ash Curtis is a brand journalist writing on behalf of Intire. He writes on a number of subjects including economics, property and technology.