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What does Johnson's mortgage pledge mean for Lloyds’ share price?

Lloyds' [LLOY] share price achieved a rare thing last Friday — it actually finished up on the week. By the close of business on 9 October, the stock had notched up a 3.8% gain following UK Prime Minister Boris Johnson’s promise to help first-time buyers. While the gains might prove to be short-lived, Lloyds’ share price is currently at a level not seen since the end of August. We look at whether Lloyds’ share price is now set to shake off what has been a terrible year.

 

What “generation buy” means for Lloyds' share price

Boris Johnson's promise of a mortgage in exchange for a 5% deposit certainly grabbed the attention of those interested in Lloyds’ share price. Making the pledge to turn “generation rent” into “generation buy” at the Conservative Party Conference, Johnson said he would help first-time buyers onto the housing ladder.

“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,” Johnson said.

As the UK's biggest mortgage lender, this helped Lloyds' share price turn around what has been a dreadful run of form. Back in March the coronavirus cut Lloyds' share price in half — a level it's been trading close to ever since.
 
Whether the announcement is enough to sustain a longer-term bounce back for Lloyds' share price is another question. Johnson didn’t go into the details of his mortgage pledge, with lenders now wondering how the policy would work in a time when banks are demanding higher deposits.

 

How could the UK government implement the policy?

The announcement comes at a time of an economic downturn as lenders look for higher mortgage deposits to offset risk. Lloyds highlighted the quality of its loan book as a sign of its robustness during the current crisis in its most recent results.

UK mortgages account for two thirds of Lloyds’ lending, according to its most recent half-year results. Around 90% of its mortgage book has a loan to value ratio of under 80%, with the average being 44%.

One option would be to tear up the affordability criteria put in place after the financial crisis. Under Bank of England rules, new applicants are limited to a 4.5x loan-to-income ratio, while banks must limit new loans. Another option would be akin to the Help to Buy Scheme, with the government underwriting a portion of the debt.

The industry is already voicing serious concerns about the plans, however. Eric Leenders, managing director of personal finance at banking trade body UK Finance, told the Financial Times “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 FT reports that many banks are unlikely to offer the 95% mortgages that the PM is calling for. This is partly due to the wider economic problems facing the country, while banks also fear lumping customers with debt they can’t pay. 

“We don’t want to be part of the problem for the future,” a senior executive at one high street lender told the paper. “People won’t thank us in 12 months’ time if they are saddled with unsustainable debt on their homes.”

 

Where next for Lloyds' share price?

With Lloyds having already set aside £3.8bn to cover any lending defaults, the bank is unlikely to welcome any more risky loans. That’s especially true as the UK is looking set to head into stricter lockdown measures in the coming days and weeks, which will put greater pressure on the entirety of Lloyds’ existing lending book — not just its mortgages.
  
Without any clarity on the plans, the benefit of the announcement for Lloyds’ share price will fade. According to the Financial Times, a government spokesperson would not confirm whether the government would back the loans, or specify the duration over which they would be paid. 

Among the analysts tracking Lloyds’ share price on the Financial Times, the stock carries an average 37.5p price target, which would see a 33.6% upside (as of 12 October’s close).

 

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