100% Right to Buy loans are just crazy

Dundee Council looks like being the first local authority to take the plunge into mortgage lending.

And taking the plunge is an understatement if ever I heard one. Its proposal to lend 100% of the purchase price to tenants looking to buy their council houses is bonkers.

As far back as 10 years ago the lender I was working for had proven this type of borrower carries a level of risk that is simply not economic to contemplate.

Given that this whole market has been driven to the point of despair by a huge underestimation of mortgage risk in the US and to a lesser extent in the UK, this revelation shows that councils should call in the mortgage experts to deal with lending decisions.

The result of this decision, if it goes ahead, is that UK taxpayers will end up underwriting risks that no high street bank would contemplate, and if there were any lenders in the specialist sector they wouldn’t lend on them either.

The fact is that Right to Buy mortgages generally do not work because potential borrowers cannot afford the repayments in the long term.

Affordability might look okay with rates at today’s levels but disaster will loom when rates go back to their historic average levels in 12 to 18 months’ time.