View more on these topics

Affordability has always been more important than LTV

The banking crisis is a result of wholesale funding problems, not retail lending.

Lord Myners’ comments on 100% LTV lending prove he does not understand this. If he did he would understand that 100% LTV mortgages can be less risky than other mortgages.

The wholesale markets tend to use LTV as an indicator of risk but if they used a correct assessment of affordability we would not be in this mess.

While I was doing my banking exams 20 years ago we were taught to assess affordability and never to lend purely against security – if you need to take security to make a loan viable, do not lend.

Security can be taken into account to reduce default risk and cost but not as a substitute for a proper assessment of affordability. That’s what you call old-fashioned banking.

Here’s an example that illustrates my case. Take two borrowers – the first is looking to buy a property worth £1m and the second is looking to buy a property worth £100,000.

The first wants to buy the £1m property with a £100,000 mortgage at 10% LTV based on an income of £10,000, resulting in an income multiple of roughly 10.

The second wants to buy their £100,000 property with a mortgage of £100,000 at 100% LTV but they have a salary of £100,000 so they need an income multiple of one. Which is the more affordable to lend to? The answer is the second borrower who wants a 100% LTV mortgage – the very deal politicians are now suggesting should be banned.

It’s affordability not LTV that matters.Students leave university with so much debt that it will take them around 10 years to repay it and save deposits for homes.

If the government is suggesting they do not repay their student debt but instead save a 5% deposit and take out an 95% LTV mortgage it should be aware that their payments will be less affordable than on a 100% LTV mortgage, thus increasing the risk of default.

George Williamson

Morgage Broker

By email

Recommended

Lenders must fight their corner

Phillip Tebbatt says politically motivated measures to address problems in the lending market could do more harm than good and the industry fightback should start here