The caveats of the 99% LTV mortgage

Rory and Sebastian Murphy from mortgage and protection network, JLM Mortgage Services, explore the potential introduction of the 99% LTV mortgage and the benefits and risks of a new low-deposit mortgage scheme.

Related topics:  Blogs,  Mortgages
Rory Joseph and Sebastian Murphy | JLM Mortgage Services
25th January 2024
Sebastian Murphy Rory Murphy JLM
"This does nothing to aid housing supply – one comment I saw attached to this story, simply read, ‘Just build more homes’ and you can’t argue with that."

Is it possible to spot we are just over a month away from a Budget, and potentially just months away from a General Election?

Of course it is, and it comes with a series of measures being openly discussed by the Treasury which are designed to provide support to various voter demographics – we’ve had the scrapping of IHT on the table, tax cuts, stamp duty changes, and just this weekend, 99% LTV mortgages designed to help more first-time buyers onto the property ladder.

The first question you might genuinely ask is whether this has any chance of making the Chancellor’s announcement, or as we have seen many times previously, is it essentially the equivalent of running policy up the public opinion flagpole and seeing which way the wind is blowing?

This Government has a history of leaking ‘policy’ which we are told is being actively considered in order to ascertain wider industry and public reaction to it. Having gauged what the reaction is, a decision is then made on whether to take it forward.

So, what reaction is the Government likely to get on this? Well, it is a tricky one. For a start, high LTV mortgages – particularly touching 100% - tend to come with a degree of nervousness.

However, in our opinion, 100% LTV mortgages - or as damn near to it as it’s possible to get – are not a bad idea. Indeed, in an environment where affordability criteria is what it is, where stress-testing is much more robust, etc, you might well argue that the risk is not what many believe it to be.

But, then there are two words which enter the debate, namely ‘Credit Crunch’ and there tends to be a heightened tension, with the words ‘not enough skin in the game’ thrown into the mix. If it’s too easy to get such a mortgage, might it be too easy to get out, leaving a trail of arrears and repossessions.

Yet, one lender we have worked with confirmed their pre-2009 100% LTV borrowers, who were approved for such mortgages, have much lower arrear levels than the ones who were below 80% LTV in the same time period.

The reason being the tougher obstacles the 100% LTV borrowers had to get over, including a much tougher credit score, and as mentioned, I think we all accept that the criteria is much tougher than that in today’s market.

Plus, we have to recognise the current market conditions for many would-be purchasers. For those renting, saving – even a 5% deposit – can seem nigh-on impossible; at least, within a short space of time, and therefore a 1% deposit is by definition going to be easier to come by.

Secondly, the market as it is, despite house prices coming down off highs, is not particularly first-time friendly in itself. With Help to Buy having come to end, supply of homes available for them has fallen, and there’s no doubting help should be available for the major problem of deposit-saving.

However, there are some caveats we all have to recognise. The potential upwards pressure on house prices with another demand-side incentive; the higher chance of negative equity with a 99% LTV mortgage; the fact this does nothing to aid housing supply – one comment I saw attached to this story, simply read, ‘Just build more homes’ and you can’t argue with that.

Plus, other questions – is this the right use of taxpayer’s money when we have lenders already offering high LTV products and when we have private mortgage insurance to de-risk this, not forgetting the Government’s own guarantee scheme?

But ultimately perhaps the main one is around supply, because without extra supply in the market there is a real risk it just adds to house price inflation which takes property even further out of the means of younger people.

So, our suggestion is that it should be made available for first-timers but why not simply offer it on new homes, then you are tying the availability of finance to a new property having to be built and made available to this demographic.

Without the supply element, you do risk this being a means of heightening the value of homes already owned in this country, and little else. Supply and demand are two sides of the same coin for a reason and, in this instance, the Government needs to ensure any 100% LTV mortgage measure works for both.


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