Industry experts are divided over the suitability of 100 per cent LTV mortgages after rumours emerged last week lenders are gauging appetite for no-deposit loans once again.
It is not yet known which lenders are looking at the sector but the talk has reignited debate about whether or not there is a place for such products in today’s market.
The number of no-deposit mortgages available stood at 238 in August 2007, according to Moneyfacts, before plummeting to just 14 a year later as global credit markets tightened in the wake of the financial crisis.
Today there are just seven 100 per cent LTV products available, none of which are standard products.
Vernon Building Society offers a 100 per cent LTV variable discount product, while Kent Reliance offers no-deposit mortgages for shared ownership. Aldermore offers 100 per cent deals only when backed by a family guarantor.
Since the Mortgage Market Review was introduced in April, lenders’ focus when assessing affordability has shifted from the use of income multiples to more individualised tests which look at borrowers’ income and outgoings.
Some brokers argue this change means 100 per cent mortgages should no longer be deemed a risky proposition for lenders.
John Charcol senior technical manager Ray Boulger says: “Many people can afford a mortgage but raising a deposit is infinitely harder as consumers are struggling to pay rent and other living costs. If we are now focused on affordability and a borrower can prove that they meet the requirements, why do we have a dearth of 100 per cent LTV products in the market?”
Lenders are required to hold greater capital reserves against higher-LTV loans, meaning any lender that offers 100 per cent deals will have to do so at a higher rate. However, Boulger believes borrowers will still be willing to pay a premium for home ownership as opposed to continuing to rent.
“The logic of MMR is that a mortgage must be affordable,” he argues. ”Any additional risk to the lender at 100 per cent LTV will be priced in and the borrower will be happy to pay a higher rate in my view. Either the MMR has done its job or it hasn’t. If the FCA is confident that it has, why can lenders not look at ways for borrowers to get 100 per cent of the property value if they need it?”
Chadney Bulgin mortgage partner Jonathan Clark also agrees that with sufficient checks and balances – including testing borrowers’ affordability – there is a place in the market for 100 per cent LTV deals once more, citing the re-emergence of 95 per cent LTV loans as a sign of increasing appetite amongst lenders.
He says: “Two years ago we had hardly anyone lending at 95 per cent but now there’s good choice and good rates available in that sector. The natural progression is we’ll see lending to 100 per cent not long from now but I see nothing wrong with that if the borrower has proved it is an affordable loan.
“Criteria would have to be in place but with the right checks and balances, we should start to look at 100 per cent LTV deals again.”
However, others argue the financial crisis illustrated the importance of borrowers having cash behind them and believe a deposit of at least 5 per cent should be required.
Coreco director Andrew Montlake agrees with this view, but also believes 100 per cent LTV deals will return to the market in the medium term.
He says: “There are a couple of deals available with no deposit but they are not your standard fixed rate mortgages. I have always believed that there should be some sort of consideration from borrowers, even if that is just 5 per cent. Of course the view held by many in this country is that increasing home ownership is a good thing and there are certainly borrowers who can afford monthly payments but can’t get a mortgage at the moment.
“It is a tough situation but with a transaction like purchasing a home, the borrower should really have some skin in the game. No doubt though we will see some lenders over the next couple of years looking again at offering 100 per cent loans as competition ramps up.”
Perception Finance managing director David Sheppard says: “I can see the logic that under the MMR affordability is the key measure so the question does come up – why is an affordable 100 per cent LTV mortgage not suitable? However, I would tend to agree with the view that borrowers should have something to show their commitment to the transaction.
“The credit crunch highlighted the risks of lending to people that have contributed nothing to the deal and I’m not sure the regulator would be too pleased to see a raft of those products again – affordable or not.”