There were obvious reasons why 100 per cent mortgages were pulled post-crisis, but with low interest rates for the foreseeable future, there has been recent calls in some quarters for a rise in LTV levels back to 100 per cent for first-time buyers.
Clearly this would help even up the divide between those who can buy because they have family help available and those locked out of the housing market because their parents aren’t wealthy enough to help provide a deposit, or guarantee a loan at 100 per cent. But is it the right thing for our industry to be considering?
There are arguments both for and against bringing back these mortgages. After all, almost exactly ten years on from the start of the credit crisis we are now in a very different world to the one back in 2007 when 100 per cent LTV mortgages were mostly withdrawn. In terms of affordability, in a world where rents frequently are far higher than mortgage payments would be even at 100 per cent LTV rates, there is probably an argument that if someone can pay regular rent without assistance from parents or others that affordability wouldn’t be a problem.
Would this be irresponsible lending in today’s market? A 100 per cent loan will have equity relatively soon if repayments are met and, with regulation dictating that applicants’ affordability is stress tested at much higher rate levels than most foresee rates going to at any time soon, affordability at the time of taking the mortgage out is probably there even if rates rise.
The Bank of England is clearly concerned with lending practices with Alex Brazier, executive director for Financial Stability, Strategy and Risk, stating, amongst other things “The sorry fact is that as lenders think the risks they face are falling, the risks they – and the wider economy – face are actually growing.”
I’m sure we remember the boom of second charge lending much of which was for loan consolidation. And what happened after the loans were consolidated? The debt was just run up again, and often consolidated again with a new second charge using the new equity in the property after house price increases.
For me, similarly, it’s the ability and ease to apply and receive personal unsecured credit-lines that is one of the big risks with 100 per cent mortgages. Yes, the mortgage is affordable day one, but 100 per cent LTV borrowers, the same as many of us, would still want nice furniture and white goods,and if they have passed a credit score to buy a house, they will probably be able to get credit to purchase these items, thus affecting their affordability immediately.
Unsecured lending is often available with far less rigorous checks than mortgages. If the market is leaning towards 100 per cent mortgages, then the regulator probably needs to step in and make the availability for unsecured lending more difficult to obtain in certain circumstances – maybe ensuring that there are no missed payments on a first time buyer’s mortgage for 12 months before granting further credit. Alternatively, affordability checks are undertaken more in line with the mortgage application process when a first time buyer applies for unsecured shortly after buying a house.
It is great that our industry is considering innovation and assisting first time buyers onto the housing ladder. It is clear both the Bank of England and the regulator will need convincing that this is prudent lending however, albeit both of these institutions are in a unique position to ensure that post completion, further lending can be less available in certain circumstances that it often is today.
Richard Pike is sales and marketing director at Phoebus Software