UK banks exclude new homes from low-deposit mortgage scheme

Britain’s largest banks are refusing to provide low-deposit mortgages to buyers of new-build properties because of concerns about inflated prices, prompting warnings from housebuilders of a potential drop in the supply of new homes.

The government will on Monday launch a new scheme designed to help buyers on to the housing ladder by encouraging banks to lend up to 95 per cent of a property’s value. The country’s largest banks have agreed to join the scheme, but have told brokers and developers that they will not lend against brand new homes.

David O’Leary, policy director at the Home Builders Federation, said: “Mortgage availability has not been a major constraint since Help to Buy was introduced in 2013, but it was the biggest barrier before.”

Help to Buy incentivised the purchase of new properties by offering buyers an equity loan. With the scheme set to end in 2023 and housebuilders effectively locked out of the new mortgage guarantee scheme, O’Leary said “there’s a risk of returning to a 2010-13 scenario, when we had the lowest annual housing supply figure during peacetime”.

Lenders’ caution around new-build properties has added to concerns that the mortgage guarantee scheme — which was touted as a transformative way to “turn generation rent into generation buy” — will have a limited impact.

“This is ultimately a well-intentioned but probably limited in scale scheme,” said Simon Gammon, managing partner of Knight Frank Finance, the mortgage broker. In addition to excluding new-build properties, Gammon cited concerns that banks would enforce particularly strict affordability criteria, and charge significantly higher rates than those on offer for borrowers with a 10 per cent deposit.

“A number of people will be able to take advantage of it, but not all the people the government intended to make it accessible to,” he said.

House prices in the UK proved much more resilient than bankers and economists expected when the pandemic first hit last year, but they remain cautious about what will happen when support measures such as furlough and a temporary cut in stamp duty are withdrawn later this year.

New-build properties are considered to be particularly vulnerable to a fall in prices. 

“Banks view someone buying a brand-new home like someone buying a brand-new car — they’re paying a premium for the fact that no one else has ever owned it, so the moment you get the keys it’s worth less than you paid for it,” Gammon said.

The guarantee scheme is designed to reduce banks’ risk by allowing them to purchase a government guarantee that would protect them from losses if a borrower defaults on their loan. However, the price of the guarantee will increase the interest rate paid by borrowers by close to 1 percentage point, according to one industry executive. 

Banks are also concerned that they could face reputational and conduct costs if a decline in house prices leaves borrowers stranded in negative equity, despite the government guarantees insulating them against loan losses. 

“Even if commercially it’s great [for the bank], is this the right thing to do, especially when you’ve got quite a frothy market at the moment?” the executive said.