I am sometimes amazed how polarised industry views can be on apparently simple subjects. Online comments seem to be posted with a fanatical fervour decrying opposing arguments.
I was personally delighted to see there has been a recent increase in the number of high loan-to-value products. In the past couple of weeks, Skipton and Nationwide have both launched 95 per cent LTVs.
The Nationwide product is slightly more complex as it is linked to a savings account that must run for at least six months to qualify and it also offers a cashback depending on how much is saved. Borrowers will need to balance the value of the cashback against the interest rates that will be charged by Nationwide compared with competing products.
It would be fascinating to know how many borrowers who apply for 95 per cent loans are actually given them. Skipton suggests that as few as one in four applicants are successful. High LTV products allow first-time buyers who do not have parents with deep pockets to get a foothold in the property market. These borrowers are not buying in anticipation of making a short-term gain but are simply trying to purchase their first home.
However, many people out there, including some national press journalists, accuse lenders providing these high LTVs of giving borrowers instant negative equity kits. With house prices edging their way downwards, it does not take long for a borrower’s meager 5 per cent equity to completely disappear. Some have suggested lenders are luring innocent borrowers into the market and giving them a huge debt secured against a depreciating asset. I could understand the argument if it was an investment that people were buying (Why buy now when you can buy it next year for less?) but I think a home should not be light as other investments you make.
There is also the argument that house prices are edging lower and, with a growing population, demographics suggests the number of households will increase. With the miserly rate of new homes being built, the demand for property will continue to outstrip the supply, pushing house prices up in the medium and long term.
Those who oppose high LTV mortgages often suggest we are going back to the mad days of five years ago when borrowers could borrow more than the value of the property. Despite LTVs increasing marginally, I think those days are a long way away, probably a decade or more. Now nearly all borrowing in excess of 75 per cent needs to be done on a repayment basis, so the loan is being repaid over time. I accept that very little capital is repaid in the early years of a repayment mortgage but borrowers can make lump-sum reductions if they want to speed things up.
Even if prices fall, borrowers will continue to make their mortgage payments as long as they have a job. Provided high LTV loans are sensibly advised, underwritten and purchased, they have a vital role to play in the current market.
Jonathan Cornell is head of communications at First Action Finance