Wednesday 7 October 2020 10:45 am

Banking sector warns against irresponsible lending after PM's low deposit mortgage pledge

The banking sector has cautioned against irresponsible lending after the Prime Minister announced plans to help millions of potential buyers onto the housing ladder by allowing low deposit mortgages.

Boris Johnson yesterday said he wants to turn “generation rent” into “generation buy” by allowing people to purchase homes with a five per cent deposit. 

Read more: Boris Johnson reveals plans to cut deposits in bid to boost home ownership

The government is aiming to boost home ownership, particularly among the under-40s.

Speaking at the Conservative Party conference, Johnson said: “For most people it is still true the overwhelming instinct is to buy, and many of them simply can’t, not because they can’t afford the mortgage but because they can’t afford the deposit.”

Banking industry body UK Finance said it will work with the government on the proposals.

However it warned against irresponsible lending. 

UK Finance managing director of personal finance Eric Leenders said: “The banking and finance industry supports innovation in the mortgage market, particularly that which enables borrowers to realise their dream of home ownership, through lower deposits”.

He added: “Firms have a duty to lend responsibly and consider the affordability of the mortgage in the long term, helping customers to avoid the risks associated with negative equity.”

The Prudential Regulatory Authority (PRA) monitors the proportion of higher Loan to Value lending mortgage lenders have in their portfolio. 

Under rules set by the Bank of England’s Financial Policy Committee, mortgage lenders must limit the number of new residential mortgage loans made with a Loan to Income ratio of 4.5 or greater to no more than 15 per cent of their total number of new mortgage loans.

Read more: UK mortgage approvals hit 13-year high in August as post-lockdown surge continues

David Alexander, joint managing director of property management firm Apropos, added: “Offering mortgages to individuals which lenders already regard as high risk has the potential to land people with future negative equity.

“No one would doubt that the intention is well meant but the execution could result in many individuals acquiring unwanted and unsustainable debt in the future”.