Brokers have said that 100 per cent LTV mortgages, with the right checks and balances, could work in certain instances for first-time buyers and help more onto the property ladder.
It comes after it was reported that Skipton Building Society was considering launching a mortgage for people “trapped in rental cycle” and would remove the need for a deposit.
Prior to the financial crisis in 2008, 100 per cent LTV or plus mortgages were more commonly offered by lenders, but then virtually disappeared from the market.
The current 100 per cent LTV mortgages on the market are guarantor mortgages, where a family member or friend can offer savings or property as security for the mortgage. Several lenders offer these kinds of products, like Barclays and Tipton.
Ross McMillan, owner and mortgage advisor at Blue Fish Mortgages said that “rather than a measure of gung-ho and reckless lending as it was then”, the return of the 100 per cent LTV mortgage could hopefully be a “clear sign of confidence in the residential property market and stability of the UK banking system”.
“Despite some negative historic connotations, demand for such an option would unquestionably be strong and for first-time buyers in particular any such opportunity would be warmly welcomed and appreciated,” he added.
McMillan said that “holistic advice, sensible lending and common sense underwriting assessment will be of paramount importance”, but these were the pillars on which UK mortgage lending is “solidly based and so should be a given”.
He continued that it would be a “brave lender” that “first puts their head above the parapet but when this happens others will undoubtedly follow”.
Luke Thompson, director at PAB Wealth Management agreed, noting that an “innovative lender could take a large share of the market by looking to introduce them”.
Demand from first-time buyers will be high
Rhys Schofield, managing director at Peak Mortgages and Protection, said that for many first-time buyers, their ability to buy was dependent on the Bank of Mum and Dad, which “shouldn’t sit right with anyone who gives a hoot about social mobility”.
“That means I certainly do think lenders and the government really should be looking at innovative ways to make zero deposit home purchases possible otherwise we are walking into a timebomb where generations of people are condemned to a retirement of poverty stuck in private rented accommodation, scraping by on whatever pension income they might have after the landlord is paid,” he added.
Scott Tayor-Barr, financial adviser at Carl Summers Financial Services, agreed that raising the deposit was the biggest barrier for first-time buyers and 100 per cent LTV mortgages “make a lot of sense”.
He said: “I think there are very few people beyond first-time buyers where a justifiable case for a 100 per cent LTV mortgage can be made.
“The biggest issue with this type of borrowing is that you need to be very careful about who you lend to, the credit score should be, quite rightly, tight with only those able to demonstrate good financial management making the grade.”
Negative equity concerns still rife
Taylor-Barr said that “a lot is often made of the risk of borrowers going into negative equity” with any form of 100 per cent LTV mortgage.
However, he said that the risk was “not materially too much greater than those with a five per cent or even 10 per cent deposit, as any downward shift in property prices are likely to put these groups in exactly the same situation, just to a slightly lesser degree.”
Thompson continued that the “biggest concern” would be around potential for negative equity.
“It will be important for customers to be aware that they may need to stay in their home for a long period of time to benefit from increases in house prices,” he said.
Thompson added that “realistically” a 100 per cent LTV mortgage would need to be on a five-year fixed rate to ensure that any fall in house prices could be ridden out.
David Robinson, co-founder at Wildcat Law said that the argument about negative equity “ignores the fact that people are using unsecured borrowing to fund deposits and renovations”.
He said that the use of affordability calculations for mortgages “drastically reduces the risk of defaults”.
Rates payable could be expensive
Justin Moy, managing director of EHF Mortgages, noted that mortgage rates payable could be “quite expensive given the additional risk” but that in the “right hands” these could be “significant options to the right type of client, but not everyone”.
Paul Neal, director of mortgages and equity release at Missing Element Mortgage Services, agreed that the cost and who the products would be available to could be a sticking point.
“Usually, we find these products are only available to a select few and usually to those who actually don’t need them. There will need to be some careful consideration when it comes to lending 100 per cent of a property’s value.
Credit quality will be key
Ian Hepworth, director at Funding Solutions UK Limited, said that 100 per cent LTV mortgages could be a “great idea”, but that the issue came down to credit quality of borrowers.
“When we look back to the heady days ahead of the banking crisis, it wasn’t the LTVs that caused issues, it was the credit quality of the borrowers. I would imagine lending to people with good credit and steady incomes is a good opportunity for lenders,” he added.
Bob Singh, founder at Chess Mortgages, said that there would be “definitely be a high demand from first-time buyers stuck in the rental trap”.
“The key will be sensible underwriting and making it available on new builds where income and rental proof is demonstrated,” he noted.
Adam Smith, founder at Alfa Mortgages, agreed that this would appeal to first-time buyers but there could be “potential risk” to the lender.
“Nonetheless, this risk could be offset through carefully structured interest rates. Undoubtedly, the introduction of 100 per cent LTV mortgages is a move that is likely to gain momentum, and those who are willing to take the plunge will undoubtedly reap the rewards,” he noted.
