The demise of the large loan mortgage has been greatly overstated. Various headlines have suggested that the market for loans over £500,000 is closed. Purchasers on these mortgages will end up paying daft rates and remortgagors will end up staying with their existing lenders as there is no where for them to go.
While I fully accept that this market is not as buoyant as it was 12 months ago, (but then again, which market is?) the reality is that this market is alive and kicking: borrowers have a decent range of options and lenders to choose from.
I still have fond memories of the HBoS rates which were miles below base rate, 0.51% and 0.76% were brokers favourites. Yes these came with a whopping fee of £1500 or so, but fees like these are quite commonplace on lots of mortgages. For a borrower with a seven-figure mortgage, a fee this size was a drop in the ocean. Anyone buying a property for more than £1m would end up paying at least £40,000 on Stamp Duty alone, so a few thousand on a mortgage was simply a drop in the ocean.
When these borrowers come up for remortgage, they are in for a very nasty shock: the ones who owe more than £1m are going to have a payment shock of at least 2%.
It is true that a couple of months ago, many lenders completely shut shop for loans over £500,000. Halifax’s core range stopped at £500,000, Nationwide stopped lending above this level totally, Abbey’s main range stopped at £550,000 and Woolwich’s best trackers at £500,000. Intelligent Finance launched a product for loans over £2m which carried a £12,000 fee even though the rates was no better than that offered for loans up to £2m, although it was good to see that C&G’s range was available to £1m.
I can understand why lenders have become nervous about large loans, as the City has suffered significant job cuts this year. Also, there needed to be an element of catching up in terms of the generosity of these rates. With funding constrained, smaller loans allow lenders to keep more borrowers happy. We have also seen lenders cut LTVs on bigger loans. No more 95% loans for £1m properties. Now borrowers have to have much deeper pockets. Many lenders started to only offer products with percentage fees on the larger loans, rather than the set fees that we were long used to.
It is difficult to assess the risks of big loans against smaller ones. You could argue either way. If the days of large city bonuses are over, the top end of the property market may struggle more than the middle market, but it depends what you define as the top end. In London and the home counties, £750,000 and £800,000 properties are very common, so there should be plenty of demand for these kinds of properties. At the very top end of the scale, house prices have not really suffered as the buyers of these properties have not had their fortunes dented by the credit crunch. Logic would therefore suggest that someone with a £500,000 mortgage would not be as badly affected by rising fuel, energy and food prices as someone with a £100,000 mortgage, as they spend a lower proportion of their income on the essentials. The person with a large mortgage has a greater scope to cut back on luxury expenditure such as holidays, new cars and clothes, so you could argue that lending to them is less risky than smaller loans. I am sure this is why lenders have offered greater multiples on higher salaries.
However, we have seen a lot of lenders re-enter this market. Recently, Alliance & Leicester, which in the past has had a miserly maximum loan size of £250,000, has offered an excellent flexible tracker with a maximum loan size of £1m; and Halifax has opened its best tracker up to loans of £750,000. We have even seen TMW enter this market on a pilot basis. The refreshing thing about the TMW offering is that is very much common sense underwriting rather than ‘the computer says no’ scorecard approach offered by many lenders. For loans over £2m, the private banks are now arguably the best offerings.
It is good to see that lenders have regained confidence in this sector and borrowers are now being offered competitive products. It is too large an area of the market to be abandoned and in my mind is no more of a risk than smaller loans, as long as they are properly underwritten. n
