Before 2009, most FTBs were borrowing at 100% LTV
“When it comes to talking about 100% loan-to-value (LTV) mortgages it is hard not to think we have time travelled back 10 to 15 years,” according to John Phillips (pictured), national operations director at Just Mortgages.
Before the financial crash in 2009, most first-time buyer mortgages were at 100% LTV, and even up to 115%. This allowed the borrower to not only purchase their chosen property, but also to have some spare cash left over for renovations, furniture and other expenses related to buying a property.
However, one aspect of that financial crash was that homeowners were unable to make their monthly mortgage repayments. As many homeowners had been accepted for a mortgage on the basis of a 100% LTV product, the banks were unable to get any money out of the properties when people were forced to default.
“Those who do not learn history are doomed to repeat it. And you would hope we had learned our lessons from the mistakes of the past,” Phillips added.
The average UK house price rose in April, up by 1.1%, or an equivalent of £3,078, hitting another new record high of £286,079, the latest Halifax House Price index revealed. Halifax said that this was the 10th consecutive month that property values had increased, the longest run of continuous gains since the end of 2016. House prices are up £47,568, on average, over the last two years.
Read more: Halifax reveals latest on UK house prices
Philips highlighted that the question of 100% LTV mortgages always rears its head when house prices rise, however there is the risk of a dip imminently. Prices may plateau, and he believes offering 100% LTV products would be risky in the present environment.
“With the cost-of-living increasing significantly from April, products would be priced to reflect the increased risk and would not be financially viable for a lot of borrowers,” said Phillips.
The energy price cap increased on April 01, for approximately 22 million customers. Those on default tariffs paying by direct debit saw an increase of £693, from £1,277 to £1,971 per year, and prepayment customers saw an increase of £708, from £1,309 to £2,017.
Energy bills are expected to increase 14 times faster than wages over the course of 2022.
Retirees are in a particularly vulnerable position as many are unable to increase their contracted hours, switch careers or work to secure a pay rise.
In addition, the Bank of England raised interest rates to 1% earlier this month, hitting their highest level in 13 years in an effort to curb inflation due to rising costs of energy and other commodities in the global market. This is the fastest increase in borrowing costs in a quarter of a century, and the rate has reached its highest level since 2009, in the aftermath of the recession caused by the financial crisis.
Still, despite the fact that budgets are stretched for first-time buyers, Phillips does not believe that that a 100% offering is the solution – pointing out that there are other options available to those struggling to put together even small deposits. He highlighted that there are joint borrower sole proprietor mortgages, 95% LTV mortgages and new deposit boosting products so there is no need for the risk of a 100% LTV mortgage. He believes these offer a better solution all around.
“We need to learn from the mistakes of the past, and the market is busy enough that 100% LTV mortgages are unnecessary,” Phillips said. “There are other options for those with smaller deposits and the risks far outweigh the rewards with 100% LTV mortgages.”