The long-awaited return of the high loan to value mortgage may have started this month with Skipton Building Society and the Post Office leading the way in 90 per centplus mortgages.
But while advisers are well aware of the acute need for higher loan to value mortgages, particularly among the first-time buyer market, is now the right time for lenders to begin offering what are inherently riskier loans?
According to eMoneyFacts, the number of 90 per cent LTV loans more than doubled in the 12 months to May 2010 from 71 products to 188.
The biggest increase has been in the 95 per cent LTV category, as the number of products available increased by 533 per cent from just three to 21 in May 2009. It says there are also eight 100 per cent loans available.
One catalyst for an increase in high LTV loans may be house prices, which have continued to rise in 2010. Nationwide revealed UK house prices experienced their first annual doubledigit increase as they increased by 10 per cent in April 2010.
Demand for higher LTV products has certainly not decreased in their absence. According to a survey by GfK Financial, more than 800,000 people under 30 would like to get on to the property ladder in 2010 but it says its analysis suggests that less than half will make it.
But is this all enough to offset the risk of accepting borrowers with such little equity at a time of economic uncertainly?
GfK Financial director Ben Steer says: “Our latest survey tells a story that is keenly understood by millions of young people across the country. The challenge for providers is to create products which will assist young people, without creating the conditions that sparked the crisis in the first place.”
Skipton products controller Richard Andrews thinks now is the time. He says Skipton’s estate agent, Connells, is predicting a steady increase in house prices and in demand for property, making it a prudent time to launch a 95 per cent loan.
Andrews says: “Uncertainty undoubtedly remains over economic factors like the state of the country’s finances, the extent of European economic issues, quantitative easing and unemployment. However, while the return to economic growth is likely to be anemic and slow, we are predicting a pick-up in growth in the second half of this year.”
The Post Office recently launched a 90 per cent deal and says it also feels that the time is right to push mortgage limits once again. A spokesperson says: “We know many of our customers want this type of product and we believe now is the right time to re-enter the 90 per cent LTV market. We will help as many borrowers as possible so long as market conditions continue to allow us to.”
John Charcol senior technical manager Ray Boulger predicts that low rates along-side cheap funding costs will buoy the mortgage market next year and as long as the lenders price for risk accordingly, 90 and 95 per cent loans will be safe bets.
Boulger says: “There is uncertainty in today’s market but there is always uncertainly when it comes to rates and house prices. If that was the reason to not offer products, then we would never see any products launched.”
London & Country head of communications David Hollingworth admits that the 90 per cent and 95 per cent loans on offer are on “a knife-edge” between safe and risky but thinks it is the right time to come back with such products to help the first-time buyer market in particular.
Hollingworth says: “I don’t think these latest loans will see a rush from first-time buyers. People still have concerns about unemployment as well as where house prices may go. But to introduce these has to be a good thing because if you do not, it removes any potential for recovery and that will only throttle the little confidence that’s out there.”
For Boulger, the risk does not lie with the product itself, rather with the distribution trend that is appearing with many of these loans. Both Skipton’s 95 per cent loan and the Post Office’s 90 per cent mortgage are only available directly and of the 217 high LTV products on the market, only 44 are available through intermediaries while 173 are direct only, according to eMoneyfacts.
Boulger says: “It is a concern that too few high LTV mort-gages are available through intermediaries because the only way the direct-sales model works is if the client gets a bad deal. Intermediary commission is around 35bps but if you factor in all the costs of trying to sell products in stores, the only way they can make a bigger profit is if they sell additional prod-ucts to the mortgage borrower, which we all know are often poor value for money.”
Regardless of the concerns, Hollingworth says Skipton’s 95 per cent loan is a landmark step and looks forward to more mortgage lenders coming to the space with broker-friendly loans.
He says: “At least with Skipton already being out there it means other lenders may be tempted to dip their toes into the water without the fear of attracting too much business volume.”