Industry calls for a return to 100% mortgages
It has been 10 years since the problems at Northern Rock sparked a financial crisis and fundamentally changed the mortgage market in the UK.
Now, a decade on, there are growing calls for regulators to relax lending rules to allow more borrowers to access 100% mortgages. Keep reading to find out more...
Lack of 100% mortgages ‘socially divisive’
High ‘loan to value’ mortgages have been credited with playing a part in the financial crisis and so the decisions to tighten the rules seems sensible. However, many industry experts have criticised the ‘kneejerk’ response to ban 100% mortgages, with the Telegraph reporting it ‘lacks logic, is socially divisive and will “store up enormous social and financial difficulties in decades to come”.’
While Northern Rock’s lending practices have been widely criticised, most analysts agree that it was the bank’s funding model, rather than its high loan-to-value mortgage business, that was responsible for its spectacular collapse.
While initiatives such as Help to Buy have resulted in more high loan to value deals, the majority of borrowers still need to find at least a 5% deposit in order to buy. These loans are typically difficult to obtain and have higher interest rates.
In 2007, 5.6% of all new lending was at a loan-to-value of 95% or more. Today that figure is just 0.2%, according to UK Finance (formerly the Council of Mortgage Lenders).
‘No reason’ to object to 100% mortgages
A number of industry experts have been vocal in their calls for a return to 100% lending. Paul Smith, chief executive of Haart, Britain’s biggest independent estate agency chain, says: “If you look back to the Nineties and early 2000s, 100% mortgages were common and were for many prudent borrowers the only way they could buy.
“The crisis has come along and now, as a result of regulatory overkill, a whole cohort of youngsters are being denied that same opportunity.”
Mortgage analysts Ray Boulger says: “There is no reason that anyone should object per se to 100% mortgages. It is a shame 100% loans are not available. If borrowers can afford monthly repayments, with a risk of interest rate rises factored in, why is it a problem?”
He and other experts argue that (unlike in 2007) applicants are currently rigorously assessed to ensure that they will still be able to afford their home loan if rates were to rise to 6 or even 8%. With many mortgage deals currently offering interest rates at 2 to 3%, Boulger believes this is a comfortable safety net.
He points out that even if house prices do not rise, it would take a borrower with an initial 100% mortgage just two years and three months to “build up 5% equity through their repayments”.
Paula Higgins of the Homeowners Alliance agrees. She says: “Banks should only be lending what borrowers can afford. But it shouldn’t be formulaic. If a generation is denied the chance to buy then there will be significant social consequences.”