So, does this mean buyers no longer need a big deposit? Well, no, it’s important not to get carried away.
In the same week as these two announced some relaxing of LTVs, HSBC said in its annual results that its average LTV on new business last year was 54%. For first-time buyers, it was 72.1%. It is not alone, as the other big lenders have similarly modest LTVs.
Yet, it is not as if HSBC doesn’t offer high LTV mortgages, because it does have 90% products. It just looks as though very few borrowers are actually getting hold of such products.
Criteria remain the main issue.
Lenders want squeaky-clean credit histories if they are to lend at 90% LTV and above. They want to minimise their risk as much as possible. You can’t blame them, but does wanting a high LTV make someone more likely to default on their mortgage?
Ironically, it is good news that Northern Rock is offering high LTVs to boost profits. While this doesn’t sound good for those with a modest deposit, as the Rock won’t be offering rock-bottom rates, at least it is serious about lending.
A complaint made all too often about lenders is that they pay lip service: they say they offer 90%, but in reality very few borrowers manage to get hold of such products.
Rates are also off putting. Those who can least afford it, because they have a modest deposit, are forced to pay a significant premium on the rate.
Northern Rock’s much-lauded return to 90% LTV comes with no product fee – great for buyers on a budget – but fixed at 6.59% for five years.
There are cheaper options: the Co-op has a five-year fix at 5.89%, with £999 fee. Over five years, most would be better off paying the fee in return for cheaper monthly payments.
One way lenders could offer a better option for buyers, at reduced risk to themselves while ensuring they don’t encourage irresponsible borrowing, is to price five-year fixes more cheaply than their two-year equivalents.
Of course, pricing is based on the money markets, but if two-year fixed rates are significantly cheaper than five-year deals, they are going to be more attractive to borrowers.
However, in this risky market where prices could fall further, interest rates will rise, and at that high an LTV, five years often makes much more sense.
Melanie Bien is director at Private Finance
