Thoughts from an active pensioner who is now somewhat past his Biblical "Use-by date"

"Why just be difficult, when with a little more effort you can be bloody impossible?"

Monday, 21 November 2011

95% Mortgages

Remind me!
I thought that it was the reckless lending of the banks and other financial institutions which lead to the banking crisis and the Northern Rock and a number of other lenders going broke, both here and in Ireland. The institutions concerned were rightly castigated by the government for being insufficiently prudent in their lending. Don't we now have a state owned "Bad Bank" containing all the failed loans from the Northern Rock?
But it seems that this isn't enough, our government is now proposing to encourage such loans by underwriting 95% mortgages for those who can't save any more! The stated objective is to encourage the housing market and enable first time buyers to get on the housing ladder.
Whilst the objective might be laudable, I cannot believe that a person who can only manage to find 5% of the property price should be taking on a mortgage. Without even thinking of the interest, if the person has had difficulty in finding 5%, how on earth is he going to find  this amount, year on year, for a further 19 years?
Looking back some thirty plus years ago, mortgages were then in short supply, and most building societies at the time insisted that you had a significant amount of money in an account with them for six months or more before they would even consider putting you on their waiting list. Others wanted you to demonstrate that you were capable of making the estimated monthly payments by putting that sum into a regular savings account for an acceptable period, this frequently being a quite difficult requirement for anyone who was paying rent on existing accommodation. A 5% deposit, you're joking, 20% minimum maybe more!
Another point is that making mortgages more readily available is likely to inflate house prices, bringing us back to square one.
Again, before buying our present house, we  had agreed the details and selling price of our previous one with a local estate agent and I was to go in Saturday morning and sign the agreement. On the Thursday the Bank of England reduced the bank rate by quite a bit, and when I went in, the agent said that he'd increased the asking price because buyers would be able to afford a bit more and more buyers could be entering the market.
In other terms, a house has no absolute value, it is merely the amount that someone wanting to buy a property of that type can manage to borrow. Make it easier to borrow, and up goes the price.

So what will the government achieve? It's proposed action seems unlikely to genuinely help first-time buyers as more people will be able to enter the market. At the same time it could leave the taxpayer with a load of bad debts.

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