In many cases, young people could afford a mortgage, but can’t buy because they can’t pull together tens of thousands of pounds for even a 5% deposit.
So we asked this week’s Marketwatch panel if 100% loan to value (LTV) could and should make a comeback? And, if not, what’s the alternative?
First time buyers face a very difficult set of obstacles to buying their first home, especially in London.
Since the removal of 100% mortgages the deposit is their greatest barrier – the stamp duty withdrawal is unlikely to have much of an effect.
Much has been said of the bank of mum and dad, but what if your family doesn’t have tens of thousands of pounds to gift?
Lenders worry that should there be a property market downturn their mortgage book’s LTV could be under pressure, meaning more securitisation requirements.
London asking prices seem to be currently unstable and falling in some areas, but the rest of the UK seems to be still rising.
This is hardly likely to give lenders confidence to re-introduce 100% mortgages.
But what of lenders whose book LTV is currently low and who are 100% securitised by their own deposit accounts?
Couldn’t they do something?
Could they bring back a maximum indemnity guarantee scheme?
If there was a property collapse, as in the past, it doesn’t take long for the subsequent rise to wipe out any negative equity.
Other innovations would be welcome, such as options to use equity in a family member’s property, via second charge, to add to the value of the purchase property.
This increases the chargeable value, across the two properties, so reducing the overall LTV to well below 100%.
That way the parents do not have to provide any cash but can still help their children make that hard first step.
The best, and right way to support first-time buyers (FTB) to get a foot on the housing ladder has long been debated by government and the industry.
Many solutions have been suggested, one that was explored by lenders fifteen years ago was flexing the loan to value upwards and providing upfront cashback.
Some lenders agreed this was a good idea and initially, 97% LTVs were offered to borrowers.
Then due to their popularity, and competition in the industry, these quickly crept up to 100% and cashbacks became a common feature on mortgage products.
Borrowers who previously didn’t feel it was possible to access the housing market were making their first move, resulting in some cases of people having no or indeed negative equity.
The demand to get onto the housing ladder outstripped supply and the UK saw house prices rise sharply.
It seemed simple and the sentiment was positive, people wanted to get onto the housing ladder and lenders wanted to support them.
The housing market seemed to be going in one direction, up, and the unquestioned confidence in the space played a part in the worsening economic environment.
This was only 10 years ago and it is important that the industry does not let this happen again.
The government, regulators and industry have made positive strides to ensure history does not repeat itself.
We’ve seen a series of positive government schemes designed to address the need to support first-time buyers, with new Help to Buy lending schemes, and the chancellor recently made the decision to remove stamp duty land tax on properties up to £300,000 for this group.
We have also seen clearer direction from regulation with the Mortgage Market Review in April 2014 and the Payment Regulation Authority’s focus on long term affordability and controls in the industry.
Intermediaries play a key role in enabling first-time buyers realise their dream of home ownership and can provide the essential advice to ensure the right decision is made for each individual, but we need to ensure that we remember the past.
The return of 100% LTV mortgages could be considered a risky option, leaving both providers and customers reliant on property prices increasing in a market hard to predict.
The last thing the industry wants is a return to homeowners, in particular those starting on the property ladder, in negative equity and stuck in properties worth less than they paid.
However what other solutions are there to help first-time buyers get on the housing ladder, when saving up deposits has arguably never been harder?
Enter the increasingly popular lifetime mortgage.
At OneFamily, one of the most popular uses for equity release is gifting lump sums to younger family members, as families share their financial wealth.
Parents and grandparents have benefited from significant house price growth over the years and are often sitting on large amounts of equity in their property, they want to stay in their home but help the younger generations in their family.
The huge growth we’ve seen in the market is in part being driven by the new products on the market where homeowners can avoid any capital being eroded in the property, by making interest payments.
Homeowners with a regular income, either through a pension or other income, pay the interest monthly, similar to a standard mortgage, leaving the value left in the property protected.
Sometimes the homeowner pays this, but we’ve also seen the younger family members take responsibility for the payment alongside their own mortgage.
We know finances are changing and we believe we will increasingly see families taking a holistic approach to managing their money across the generations.