Why we need 95% mortgages

High LTV mortgages are beginning to creep back into the market. Here's why it's a good thing...

The country has a collective bad taste in its mouth. It’s a bad taste that was left by the housing bubble and continues to linger. But it’s a bad taste that is playing a big part in preventing thousands of first-time buyers from getting onto the housing ladder.

Our collective aversion to high LTV mortgages was laid out for all to see when Northern Rock – the adopted symbol of housing bubble greed – returned to the 90% mortgage market back in March. Forums and threads came to life with warnings of a return to haphazard lending practices and predictions of a new housing bubble.

Well since then high LTV mortgages have continued to creep back into the market. But with first-time buyers still struggling to scrape together deposits and buy-to-let investors cashing in on a lucrative rental sector, this is anything but a bad thing.

Secret talks

According to financial information site Moneyfacts, the number of 90% and 95% mortgages now available has reached a post-crash peak. And this return could be fuelled even further if the details of secret talks that are reported to have taken place between lenders, homebuilders and the Council of Mortgage Lenders (CML) turn out to be true.

Last week The Times reported that talks had taken place to discuss freeing up supplies of finance and assisting first-time buyers with low deposit mortgages. One possible scheme could see builders contribute to a fund that would be used to underwrite mortgages of up to 95% of a property’s value. In return builders would expect lenders to loosen up their credit-scoring criteria, granting more high value mortgages and pushing up demand for new-build properties.

This plan is similar to the scheme unveiled by George Osborne in the last Budget that allows first-time buyers to purchase a property with a 5% deposit and a 20% loan jointly funded by the government and homebuilders.

Stem the BTL bubble

Now, these schemes (along with straight high LTV mortgages) have been widely castigated for failing to deal with the real problem faced by first-time buyers, namely that house prices are simply too high. And to a degree, this criticism is valid; a fuller solution is needed. You can read what I think should be done to fix the housing market here.

But still, we shouldn’t write off these schemes, or indeed high LTV mortgages as shallow solutions designed to solely benefit the banks and builders. They do have a part to play in stemming another dangerous bubble that is swelling in our property market.

As the residential mortgage sector stagnates, more and more people are prevented from getting onto the housing ladder and forced to rent. As a result the buy-to-let market has undergone a rapid bounce back. This surge of confidence has rippled through the entire rental industry. Lenders are favouring landlords over first-time buyers, home movers are selling to landlords over first-time buyers and developers are building properties tailored to tenants, not first-time buyers. New homeowner housing stocks are depleting and as I noted last month, a dangerous bubble is growing in the buy-to-let sector.

This is not a bubble that can be fixed through the heavy-handed regulation of the buy-to-let sector. With nine tenants chasing every room in London and rents heading skywards, the last thing we need now is a cap on the supply of rental properties. No, the problem needs to be tackled from the top down.

If banks can be encouraged to lend to first-time buyers at high LTVs rather than landlords, the market distortion caused by buy-to-let can be reduced. Likewise if builders are brought on board and encouraged once again to continue developing properties aimed at first-time buyers, rather than buy-to-let, the key problem of a giant lack of available housing can begin to be addressed and erratic house price inflation can start to be tamed.

It is quite simply not good enough to bemoan builders for refusing to cut prices for first-time buyers when a hungry buy-to-let market is waiting to gobble up new-builds, pass the expense onto renters and push up the prices of what residential properties do remain.

Timing

A further criticism frequently levelled at high LTV mortgages is that in the current shaky financial climate, loading ‘young people’ with high levels of debt is almost certainly a terrible idea. Again, I agree; but only to an extent.

To begin with, constantly referring to first-time buyers as ‘young people’ is inaccurate and creates a false impression of the profile of this home-seeking crowd. The average age of a first-time buyer is now 38 (hardly young!) and more likely to be made up of families and settled professionals than naive, immature, debt-addled graduates.

Taking on debt at any point is always going to pose something of a risk. But this risk depends largely on your current situation, rather than the state of the market. If you have a stable and sustainable income and are confident that you can meet the repayment criteria, yet cannot afford to save anything more than a 5% or 10% deposit (which is likely in the current rental sector), I see no reason why you shouldn’t opt for a high LTV mortgage.

We’re deluding ourselves if we think that re-introducing 95% mortgages will set of the profligate lending practices seen in the housing bubble. As I noted in a previous article, the ghosts of Northern Rock and Bradford and Bingley are still causing lenders to keep their credit criteria tight. A recent e.surv study found that less than one third of all mortgage approvals have an LTV over 75%.

A handful more high LTV deals will alter but not substantially change this credit conservatism.

House prices

It is also wrong to state that picking up property in the current market is a certain losing gamble on a volatile, declining housing market. Granted, no one can or will ever know for certain where house prices are heading next, but while many are predicting a continued dip over the next year, there is a general feeling that prices will stabilise in the long term.

Again, this is more down to personal situation than the market situation. Buying now (or at any point) is probably not a good idea if a change in your housing needs could be on the cards fairly soon. But if you are confident in the longevity of your current needs and able to ride out any house price falls, now is as good a time as any to get onto the ladder.

Indeed, a look at the figures reveals a relatively healthy market; house prices are not increasing substantially (or unnaturally) but not (yet) dipping, fixed mortgage rates are at a six month low and first-time buyer products are growing.

If lenders can rid themselves of the high LTV bad taste that continues to linger, we will all be better for it.

Fixed mortgages for small deposits

Variable mortgages for small deposits

A good idea?

Are high LTV mortgages a good idea?

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