How would a ‘Generation Buy’ scheme work?

In recent years it has become increasingly difficult for young people to get onto the property ladder, resulting in many young adults choosing to rent their home. However, the Prime Minister hopes to change that, promising to turn ‘Generation Rent’ into ‘Generation Buy.’

If you’re interested in taking advantage of this scheme, you may be wondering what it will entail, as details have been scarce. Read on to find out how a ‘Generation Buy’ scheme may work.

The Prime Minister hopes to address the falling number of young homeowners

In his speech at the Conservative party’s virtual conference in October, Prime Minister, Boris Johnson, addressed the issue of many young adults being forced to rent due to rising house prices and a lack of low-deposit mortgages.

According to a report by the Office for National Statistics, the proportion of 25-to-29 year olds who owned their own home has almost halved in the last 30 years, falling from 67% in 1991 to just 38% in 2016.

Due to the scarcity of high Loan-to-Value (LTV) mortgage products available in the market, many young adults are struggling to afford a large enough deposit to secure a mortgage.

High-LTV mortgages of up to 95% were on offer in 2020, but many lenders withdrew them in response to the coronavirus outbreak in order to lessen their exposure to risk. This has left many young people once again facing the prospect of having to rent for the foreseeable future.

The government’s promise of help is welcome news to many people, although it isn’t clear how the ‘Generation Buy’ scheme would work, since Boris Johnson has yet to reveal full details.

Reducing the strictness of the ‘stress test’ may help young buyers

One of the suggested ways that the government may help young adults is to reduce the stringency of the ‘stress test’ that buyers must undergo when applying for a mortgage.

Lenders introduced this stress test after the 2008 financial crisis as a means of ensuring that the buyer could afford the mortgage that they were taking on, protecting the lender from bad debt. The test considers factors such as household income, monthly outgoings, and the likely impact of interest rate rises on affordability.

There have been suggestions that the government may reduce the strictness of the stress test for high-LTV mortgages or even remove them altogether.  Whilst the latter option may expose lenders to significant risk, it is possible that the government may guarantee the loans, either partially or fully.

Mortgage guarantees may make lenders more confident in offering loans

It has also been suggested that the government may encourage lenders to offer more high-LTV mortgages by reducing the loan risk with a state guarantee, hopefully making them more likely to offer more high-LTV mortgage products.

This strategy could be similar to the Mortgage Guarantee Help to Buy scheme, which ended in 2016. In this scheme, the government underwrote 15% of the mortgage, giving lenders the confidence to offer more risky mortgages.

Whilst this strategy could be an effective way of increasing the number of affordable mortgages for young people, it would also mean that the government may be liable for billions of pounds in loan guarantees.

This is Money reported that, in a worst-case scenario, the government may be liable for up to £44 billion worth of guarantees if the scheme is applied to two million new homeowners.

Due to the heavy strain that the response to the pandemic has had on the Treasury in 2020, if the government does choose this option it is likely that they will only underwrite a portion of the loan rather than the full amount.

The government may put pressure on lenders to raise their mortgage lending caps

Experts have also suggested that the government may put pressure on the Bank of England to relax the rules on ‘income multiples’ to help first-time buyers.

Since 2014, buyers have typically only been able to borrow four and a half times their income. This can pose a problem, particularly for young adults whose incomes tend to be lower.

According to ONS figures, the average 22-29 year old earns around £25,000 annually. This would mean they could only borrow around £115,000, making home ownership difficult if they were buying alone.

These caps are intended to protect lenders and borrowers from the risk of sudden rises in interest rates. However, the government is hoping to promote more long-term fixed-rate mortgages, meaning that interest rate rises should not be a problem in the short term.

Furthermore, by the time rates do rise, buyers are likely to have a higher income which would make higher repayments more affordable.

Whilst the government could employ any of these strategies to help young adults get onto the property ladder, we will have to wait until the details of the scheme are fully announced in the future.

Get in touch

If you’re interested in buying a home but don’t know if you can afford it, we can help. Email or call us at (0207) 808 4120 to find out more.

Please note:
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.