The Building Societies Association (BSA) has put forward a raft of recommendations to support aspiring young homeowners, which includes ideas to boost product ranges which allow parents or family members to support them
In its report, the BSA opened a discussion about whether some lenders could ‘revisit the case’ for lending up to 100% loan-to-value (LTV) products.
These are mortgages which provide borrowers with a loan to cover 100% of their property’s value, meaning they do not require a deposit. Historically, these mortgages posed a greater risk to the lender and as such they were pulled when the financial crisis struck.
It was no surprise, then, that the BSA’s suggestion they might help stimulate the market again for potential first-time buyers was met with some criticism in the financial services industry.
Special circumstances
The BSA said it thought there were some circumstances where the risk associated with 100% mortgages could be mitigated – for example if the borrower was in a profession with high future earnings potential, if they were likely to come into a large inheritance or if they had parental guarantees.
However Tim Bennett, partner at investment house Killik & Co thought the reintroduction was a ‘bad idea’.
He said: “With house prices stalling, or falling, in real terms across many parts of the country, any zero-deposit buyer risks being plunged immediately into negative equity – where the value of their home is less than the debt secured on it.
“Worse, they will be leaning into the headwind of rising interest rates. The fact that an eligible buyer may have an inheritance coming, or be on a lucrative career path doesn’t magically justify them sinking good money into a bad decision.
“Faced with an uncertain economic backdrop, the prospect of a messy Brexit and an unpredictable political situation, any measure that seeks to stimulate housing demand, by encouraging highly-geared buyers into a rocky property market, looks rash at best.”
But the BSA said its Building on the Bank of Mum and Dad report, in which the 100% LTV option was suggested, aimed to explore and stimulate the debate on ways to help aspiring young homeowners over the long-term.
Paul Broadhead, BSA Head of mortgage and housing policy, said: “I guess we can say that debate is being stimulated.”
Tackling problems faced by first-time buyers
He explained borrowers and lenders would of course both want to carefully assess the prevailing risks, but the issues facing first time buyers were likely to persist.
Statistics show 86% of people want to own their home, however over half of aspiring first-time buyers didn’t think they would in the next 10 years. Raising a deposit was the single biggest barrier they face, and 59% expect their families to chip in.
Broadhead added: “Before the financial crisis, a first-time buyer getting a mortgage had a deposit of about 60% of their nominal income if they were buying by themselves, or about a third of their joint income if they were buying with a partner.
“In the last two and a half years, the ratio has averaged almost 90% of a single first time buyer’s income, and half of joint buyers’ incomes. It is clear that until the Government gets its act together on housing supply that these challenges will remain.
“Obviously there is no single magic bullet – I wish – so we need continued thinking and innovation across many fronts.”
In the report, the BSA made clear that underwriters appreciated the risk factors associated with higher LTV lending, including 100% lending.
It said there were circumstances in which the risk could be mitigated and a type of insurance for the lender might be possible. Indeed, advancements in technology could also boost the accuracy of credit assessments to enable lending above 95% LTVs.
“These are the kind of avenues that could be explored to help first-time buyers in the future,” Broadhead added.
