In light of the 2007/8 economic collapse UK mortgages, along with many others around the world, attracted intense regulatory focus. This resulted in new regulations which effectively banned 100% UK mortgages with the average loan to value ratio now around 75%. It is possible, under limited conditions, to obtain a mortgage with a 95% loan to value ratio but these are more expensive and extremely rare these days. So, is it time to bring back the 100% mortgage and save the UK first time buyer market?
Current mortgage statistics
If we look back to 2007 we will see that 5.6% of all new mortgage lending was agreed at a loan to value ratio of 95% and above. As of today, according to UK Finance, the figure now stands at just 0.2% which has significantly hit the UK first-time buyer market. When you bear in mind that new mortgage applicants today are stress tested on rates of 6% or even 8%, to see whether there affordable, the idea to bring back the 100% mortgage does not seem so far-fetched?
In many ways former mortgage giant Northern Rock was to blame for the regulatory changes with the company often agreeing mortgages at a 125% loan to value ratio. This effectively meant that Northern Rock was lending more than the value of the property and therefore had no headroom in light of financial troubles. The idea of reducing the average mortgage to 75% of the value of the property means that there is more stability because there is initial headroom of 25% which will grow as the equity element of the borrower increases. The idea behind this is that banks have more stability, consumers have less financial pressure and this should protect not only the mortgage sector but also the UK money markets.
Is it time?
If you look back to the regulatory environment for UK mortgages prior to 2007 it is very different to the one we see today. Regulations are much tougher, stress tests more comprehensive and more customers than ever before are being refused mortgage funding. Supporters of a return to 100% mortgages highlight the fact that these were more prevalent in the 1990s when there were no real issues. Yes, the 2007/8 economic crisis exposed the risks of a 100% mortgage but let us be honest, there were many other economic frailties exposed at the time. So, would this reinvigorate the first-time buyer market?
Stress tests offer protection
The current stringent stress tests would still be in place in light of a relaxation in mortgage regulations and therefore customers failing these tests would not be offered the higher loan to value ratio. It would only be those who were in a position to cover their financial liabilities going forward and according to industry experts it would only take around two years to build up an equity stake of 5%. While this kind of headroom is nowhere near the 25% available today it does at least offer some protection to lenders if customers were to struggle with their mortgage liabilities.
Whether we like it or not, while regulations introduced after the 2007/8 economic crash have been helpful to steady the ship they have not assisted the first-time buyer market. Not everybody is in a position to borrow money from the bank of “mum and dad” therefore a controlled and regulated return to 100% mortgages would reinvigorate the first-time buyer market. This would inject more liquidity into the UK property market, reduce unhelpful price squeezes and hopefully eventually help to rebalance the supply/demand ratio.