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Head2Head: Is the BOE right to infer that high-LTV mortgage lending could be ‘risky’?


Jonathan SamuelsJonathan Samuels, chief executive, Octane Capital

A wise man once said: “The only thing we learn from history is that we learn nothing from history”, and there’s an element of truth in this in relation to high loan-to-value lending.

Now while the market will never (he says) return to the obscene heights of 125 per cent LTV lending – the last product of which was pulled almost 10 years ago – average LTVs have slowly but surely been edging up since the global financial crisis.

In records from its March Financial Policy Committee meeting, the Bank of England noted spreads between 90 per cent LTV and 75 per cent LTV loans have nosedived since 2016, something that “was unlikely to reflect an improvement in underlying credit quality”. That’s certainly hard to argue against, as many people have been borrowing like it’s going out of fashion in the low-interest-rate environment.

Now it goes without saying that highly leveraged households plus high LTV lending is a toxic cocktail, especially in an economy that is effectively flatlining and, as Brexit looms closer, approaching an unprecedented politico-economic hurdle. Equally, there’s no doubt that both the property and the mortgage markets would grind to a halt if higher LTV loans weren’t available, and if the circumstances are right and a lender genuinely comfortable with the risk, they can be appropriate.

But it’s when lenders chase market share, stretch to 95 per cent LTV, and fail to price for risk, that things can start to go badly wrong. The Bank of England has said 90 per cent LTV lending has now ‘recovered from its crisis troughs’, so surely now is as good a time as any for the mortgage industry to debate, in its own longer-term interests, whether 90 per cent is as high as it should go at all. That way there’s risk but not extreme risk, and enough wiggle room for the property market to stay on track.

My worry is that 95 per cent LTV leads to 100 per cent LTV, and off we go all over again. We surely all want property and mortgage markets that are sustainable rather than prone to boom and bust?


Jeremy Duncombe, director of intermediary distribution, Accord Mortgages

It is right that there is a debate surrounding higher LTV lending and the potential impacts it could have on the wider economy – it is in nobody’s interests for lending to be unsustainable.

But it is also fair to remind everyone of the measures that mortgage providers take to make sure we are lending responsibly.

At the macro level, we have limits in place to manage the proportion of higher LTV business we write, alongside measures such as extensive loss modelling, forecasting on future pricing, stress testing, and capital management systems.

The concern is how these measures will withstand the strain of a higher interest rate environment but, as Alex Brazier from the Bank of England said, there is no sign as yet that too many risks are being taken.

At the micro level, our own assessment of individual borrowers’ ability to afford a mortgage is extremely comprehensive.

The Mortgage Market Review essentially hard-wired affordability models and stress tests into the lending process to ensure it is appropriate to the individual. This means that a mortgage, at any loan to value, should only ever be offered to those borrowers who have proved they can afford to pay it back even if interest rates rise.

It’s important not to overlook the difficulties that borrowers, in particular first-time buyers, face in getting on and moving up the property ladder, which further limits on lending could exacerbate.

Placing restrictions on lenders via additional capital requirements relating to higher LTV lending risks stifling the housing market – given the low margins in which lenders are operating, the cost of funding that finance will need to be borne by the consumer, to at least some extent.

Reducing the number of people able to get on the housing ladder feels counter-intuitive given all the government support that’s gone into building more homes and supporting FTBs. Limiting our ability to lend risks undermining what we’re fundamentally here to do: help people who can afford it to buy the home they want.



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