We should look to Canada as a model for lending as its defaults have remained low and banks solvent in the downturn. This was achieved by using mortgage indemnity insurance for loans above 80% LTV
During the downturn Canada was a great example of this system – now it’s a proof point. Defaults there have remained below 1%, banks have remained solvent, the flow of credit has remained open and the secondary market has remained liquid.
In the UK there have been mentions of implementing LTV caps in recent months. This quick and dirty approach runs the risk of choking housing market recovery by excluding borrowers with a good credit history and who meet affordability criteria.
An unintended consequence would be to encourage borrowers to seek unsecured lending for a deposit.
Or they would remain in the private rented sector, with the threat of rising rents fuelled by buy-to-let landlords who can access the properties at the bottom end of the market when first-time buyers can’t.
We believe this strategy could delay the recovery, ironically at a time when house prices are more affordable. Socially, it’s unfair on those who cannot rely on parental support with a deposit.
There is a historic opportunity to create this new sustainable framework. It will take a fresh perspective and political courage to make it work in these challenging times.