Few financial services products provoke more criticism and debate than the 100% LTV mortgage. Even the mention of it triggers hand-wringing headlines and pearl-clutching in some quarters.
But with two lenders reintroducing no-deposit mortgages to the UK market in recent weeks, it’s worth stepping back and reassessing such product innovation in the context of today’s consumer demands.
While some products may have become a symbol of pre-crisis excess, 100% LTV mortgages didn’t cause the 2007/08 crash. And for me, they can play a valuable role in today’s modern, well-regulated market.
An obvious criticism of 100% LTVs is the risk of negative equity. It’s a valid concern – if house prices fall, borrowers with no equity are more exposed of course.
But clearly this risk isn’t unique to 100% LTV loans – anyone buying with a small deposit faces similar challenges. All mortgages involve risk for borrower and lender.
What critics often ignore is that the upside of 100% LTV lending can be significant, especially for first-time buyers locked out of the market by unaffordable deposit requirements.
Getting onto the property ladder sooner means benefiting from house price inflation, building equity and avoiding the wealth drain of long-term renting.
Many borrowers are lucky enough to have help from the Bank of Mum and Dad. Others are not. According to Savills, the estate agent, 48% of first-time buyers received no parental assistance last year.
The reality for deposit-strapped but creditworthy borrowers
These borrowers may well have strong, stable incomes, but what they lack is £30,000–£50,000 for a decent deposit. For this group, a 100% LTV product could be the difference between renting indefinitely or owning their own home.
To appreciate the potential role of these mortgage deals in today’s market, it’s important first to understand how the lending landscape has evolved since their heyday.
The reason 100% LTV mortgages have a tarnished reputation is not because they allow borrowers to buy a home with no personal stake.
It’s because prior to the financial crisis, many borrowers were granted one without having to pass an affordability test. But today’s lender due diligence couldn’t be more different from the pre-crisis era.
Since the Mortgage Market Review, lenders have been required to apply detailed affordability tests, stress testing loans to account for future interest rate rises and verify borrowers’ income. This raft of mitigations didn’t exist 20 years ago.
Even with the FCA looking to reduce restrictions and fuel growth, lenders are still subject to one of the most robust regulatory frameworks of any sector.
It’s not just regulation that has developed – technology now delivers extensive insight into borrower income and spending, enabling far more granular affordability assessments than were ever possible in the 2000s.
A niche, not the norm
In other words, lenders today know far more about their customers and can lend with greater confidence as a result. That’s why arrears remain at historically low levels despite the rate shocks experienced by borrowers over the past couple of years.
And, in the grand scheme of things, the 100% LTV loan is a niche product. Even in their heyday mid-2000s, they never accounted for more than a sliver of total mortgage lending.
FCA data shows that, in Q1 2007, loans above 95% LTV account for less than 5% of all lending. Today, I would be surprised if 100% mortgages accounted for more than a 1% market share. This is not an opening of the floodgates. Most borrowers will continue prefer to put down a deposit to reduce their monthly repayments.
One of the more enduring criticisms of 100% LTV mortgages is that borrowers lack “skin in the game”. In other words, they don’t have any incentive to maintain repayments, as they have nothing to lose if they don’t.
I’ve always found this argument spurious. While these borrowers may not start with equity, they build it with every repayment. Their financial commitment is real from day one – every month they’re paying down capital, reducing risk for the lender and building wealth for themselves. For the vast majority, it is ‘home’ and a place they certainly don’t want to lose.
To me, the reappearance of 100% LTV products signals something positive: a growing appetite among lenders for calculated risk – risk that is thoroughly assessed, well-understood and priced appropriately based on robust data and underwriting standards. That is essential for a well-functioning market – something, one could argue, that has been to a great extent missing from the market since the financial crisis.
It shows lenders are exploring ways to satisfy underserved customer segments without compromising unduly on credit quality. That’s a good thing for borrowers, intermediaries and for the market as a whole.
Evolving solutions for modern challenges
Competition encourages responsible innovation. It also gives brokers more tools to match borrowers with appropriate products – especially those with solid incomes but limited assets.
The stigma around 100% LTV mortgages lingers not because of what they are today, but because of the borrowing landscape of the past. But markets evolve – and so must our attitude.
These products aren’t a reckless throwback. In a world of rising rents, buoyant house prices and tightening affordability, they offer a practical solution for a subset of borrowers.
Such products won’t suit the masses, but a 100% LTV product can once again be a useful –if niche – solution for the right borrower.
So, let’s judge these mortgage product innovations not by their past, but by their appropriateness in today’s market.
Rob Clifford is Chief Executive of mortgage and protection network Stonebridge
