With many prospective buyers struggling to save for the necessary deposit on a property, Moneyfacts.co.uk’s latest report that large deposits are no longer required will be met with relief by consumers. Yet, while it technically may be true, it still holds that those with a deposit get better interest rates and have greater flexibility when it comes to remortgaging. But in a society that wants everything now without having to save, could we see smaller and smaller deposits?
Moneyfacts.co.uk has observed an increasing number of lenders raising their loan-to-value (LTV) limits, with seven lenders doing so in September. Several have raised their minimum LTV limits across their entire product range by up to 10 per cent.
Industry commentators remark that the increase of LTVs is not a new trend, as they have been increasing for some time. Yet, James Cotton, mortgage specialist at London & Country, sees the development as a sign that the mortgage market is continuing to mature. “Customers borrowing 95 per cent LTV aren’t necessarily the risk or bad borrower they were once viewed as and lenders are more willing to take on certain customers they would have turned down before. Having a history of these types of borrowers helps lenders come up with deals that are priced accordingly. But lenders are not doing anything rashly. They have rigid risk criteria to keep within, though keeping competitive is a factor.”
Despite the attraction of a depositless mortgage for consumers, Cotton points out it all comes down to risk. “The more your deposit amounts to, the less you need to borrow. One factor to consider is possible negative equity. If people borrow the full amount of the property price, they’ll have zero equity in their home. People have got to be more aware of what they’re getting into. But I think the idea is still very much there of putting your own equity into the property and having that peace of mind there.
“The size of the deposit doesn’t make the mortgage more or less affordable. But having a deposit gives people more flexibility. The bottom line is people can sell the property if they’re in trouble, whereas negative equity makes it harder.”
Affordability
While the raising of LTVs recognises the struggle home buyers face to step onto, or up, the property ladder, and offers them greater choice, Moneyfacts.co.uk notes lenders should not forget the importance of affordability.
The Chelsea Building Society is one lender which increased its LTVs from 75 to 85 per cent on a number of its fixed rate mortgages. Vicki O’Connell, spokeswoman for the Chelsea, says: “At Chelsea, we constantly review our lending policies and one of our more recent changes has been to up our LTV limits. We decide on these changes by taking into account factors such as risk and pricing, while also looking at consistency compared to the marketplace and our other products.
“Throughout any change, affordability and sustainability remains the highest priority to us and any alterations we make would always compliment our responsible lending policy. Our experience shows we are on the right track as we have a lower level of arrears than the majority of the lending marketplace.”
However, when it comes to lenders raising LTVs, Jeff Knight, director of marketing for GMAC-RFC, says the market as a whole cannot be generalised easily. “Every lender has different business objectives. I know some lenders stay away from high LTVs because it doesn’t fit their business model. Lenders will always change criteria to get the business they want and that will vary from firm to firm.”
Few other options
While lenders face the risk that comes with raising LTVs, Nicholas Hanson, director of Hanson Financial Management, feels they face little option as property prices continue to increase. “Even a graduate needs a very reasonable salary to get on the property ladder these days and those are few and far between. It’s always great to encourage people into the property market and anything that broadens the choice that potential first-time buyers (FTBs) have of getting into the market is good. Raising LTVs does that, as long as lenders don’t compromise affordability calculations to do so.”
But Knight feels the most fundamental problem is that people aren’t saving enough. “Potential mortgage borrowers are generally not aware that they need to save. The amounts you need for a deposit also just keep going up and up and products have to reflect what people need.
“The technology used now can make far better decisions using affordability models. Getting more data gives a more informed decision. But I don’t believe having high LTVs will make people laissez-faire about deposits, especially as they can get better product rates with a deposit.”
The risk factor
Though the prospect of a 100 per cent mortgage is attractive, Hanson was unsure whether all lenders can afford to go there. “It’s not a mass market product because of the risk to the lender and the burden to the borrower. I think 100 per cent products have lost their appeal for the time being. An IFA outside London would struggle to find the perfect client for a 100 per cent mortgage. They’re a great advert, but I think 100 per cent is always going to be a niche.
“The market is more precarious now because of the number of people defaulting on mortgages. You can’t take a long or short-term view of the market based on past performance and I think the housing market is set for a tough time.”
Hanson sees more advantage in lenders offering guardianship mortgages than raising LTVs as a way to help people onto the property ladder. “Lenders ought to be looking at positive parental input where the parents take an active role in security,” he says. “Most parents have a low mortgage and high equity. Lenders should simplify criteria and not base decisions on income but security, so linking the parents equity and stopping the need for gifting.”
While this may offer a possible solution for some, Cotton points out that not having a deposit has become part of some people’s investment decisions when buying up properties, as they take advantage of low interest rates and high property returns. But in the end, the benefits of having a traditional deposit are still there, despite the choice now offered. Potential buyers may just have to face the fact they will need to continue to save.
