I may have mentioned this before but when we bought our new place and took out a mortgage last year, our loan to value was way below 20 per cent. As a result, we were able to obtain a fixed deal on the best possible terms.
But for hundreds of thousands of first-time buyers every year, that kind of option is not on the cards. According to a new report last week, sponsored by the specialist insurer Genworth Financial, the number of 90 per cent LTV mortgages, which one might typically associate with first-time buyers, fell from 245,000 in 2006 to 28,000 in 2009.
That staggering 89 per cent fall effectively means that a minimum of 100,000 potential FTBs have fallen off the radar every year since 2006.
Don’t get me wrong, this is not a column arguing in favour of FTBs buying a property willy-nilly. If you cannot afford it, fear that it may plummet in value, are worried about your future job prospects or view property ownership solely as a five-year investment opportunity rather than having a roof over your head for the long-term, do not buy.
Having thereby winnowed out the number of prospective buyers, two questions still need to be asked about this exodus from the market. First, is it because potential FTBs no longer want to buy a property? Second, have they been excluded because they are inherently “poor” risks?
The answer to both questions is a qualified no. All surveys show a large majority of people in their 20s and 30s still want to own a property at some stage in the next five to 10 years. Many would like to do so much sooner but face serious difficulties accessing cheap loans to help them achieve their goal.
As for their risk rating, while this is more debatable, evidence suggests it is not so much issues of shortor medium-term affordability that frightens lenders but the risks attached to offering borrowers LTVs of 90 per cent or higher in a climate where a potential combination of market falls and an uncertain jobs market could lead to a repeat of the financial crisis in late 2008.
The result is that while some lenders are prepared to consider 90 per cent LTV applications or higher from first-time buyers, in many cases, they are required either to pay absurdly high interest rates compared with borrowers on lower LTVs or a very high processing fee. The fee itself does not protect the lender against default.
In practice, although many FTBs find it possible to put together deposits of up to 10 per cent, they cannot get to 20 per cent or more, so they remain excluded form the market for affordable mortgages. Partly as a result, the research, by Professor Steve Wilcox, from the University of York, says the average age of FTBs is rising from 33 only a few years ago to 36 today.
Is there a way round this conundrum? Two years ago, at the height of the financial crisis, I wrote a column arguing that it was time to reconsider the possibility of bringing back old-style mortgage indemnity guarantees or Migs.
Fifteen years or so ago, Migs were highly unpopular, for two main reasons – randomly applied by many lenders, they added many hundreds of pounds to mortgages at the time. In addition, as tens of thousands of borrowers caught up in the last property recession of the early 1990s discovered, paying a high Mig did not stop a lender or its captive insurer chasing you for extra money if you lost your home and your home was sold at a loss.
Yet today, a Mig could be just what many borrowers need. Obviously, not every-one might be tempted by the £2,000 or £2,500 Mig charge applicable to a typical £150,000 loan. But for some FTBs, more fairly applied Mig without long-term comebacks could offer a lifeline. As a rough calculation, if bundled into the loan, it would add a further £8 to £10 a month to their mortgage costs, at which point borrowers face two options.
If the market remains flat or even falls, they would have to knuckle down and repay as much as possible of the original loan for the next five or 10 years, thereby reducing their remaining LTV. At a typical repayment rate, it would mean paying back between 10 and 20 per cent of the loan over that period.
Alternatively, if the market moved upwards even marginally over the next five years or so and they kept paying off the loan, they could boost the equity in their property more quickly, thereby reducing the need for further Migs in subsequent loans.
Migs are not the only solution to the problem but they offer some lenders the option to accept borrowers they know are highly likely to be able to repay their loans yet are currently shut out of the market.
The alternative is that things remain as they are. Then, when the market eventually recovers, lenders repeat the same mistakes they made the last time round, over-lending to poor credit risks and failing to insure themselves against loss. Is that what we really want?
Nic Cicutti can be contacted at firstname.lastname@example.org