Lower mortgage thresholds could cause market collapse warn experts | Personal finance | Finance

This is just one more indication of the problems associated with solving the chronic housing shortage.

Another is that the specter of negative equity is once again lurking in the market as lenders start offering riskier mortgages at the same time price growth slows.

Halifax, part of the UK’s largest mortgage lender, Lloyds, has increased its maximum loan-to-value (LTV) ratio on mortgages for new homes from 90% to 95%.

It will also increase LTVs on housing association condominium properties, so first-time buyers only need a 5% down payment.

Yet experts say letting someone buy a £289,099 house with a £4,000 deposit could backfire as inflation soars, mortgage rates rise and recession looms.

If house prices drop slightly, recent buyers could instantly fall into negative equity – where a property is worth less than the money borrowed to buy it.

About 1.8 million homeowners suffered negative equity in the early 1990s after house prices fell. Many have been unable to move because they have not been able to raise the money needed to pay off their debt.

Last year Lloyds, Barclays, Santander, HSBC and NatWest refused to offer 95% mortgages on new builds, despite a new government loan guarantee designed to reduce risk.

If a mortgage borrower defaults a year or two after purchase and the lender needs to repossess the property, they may have to sell it at a loss.

One in 10 new construction homeowners sold their property for less than they paid in 2020, according to Hamptons International.

Yet Halifax is taking the leap. Andrew Mason, head of strategic partnerships and housing, said he would support the new build market: “Getting a down payment remains the biggest hurdle for most first-time buyers.”

Andrews, managing director of KIS Finance, said many first-time buyers would be fine with only having to save a 5% down payment instead of the usual 10 or 15%.

But she warned that high-rpm loans usually mean borrowing more money at a higher interest rate: “With the cost of living showing no signs of letting up, some people could be in trouble.”

Buying with much smaller deposits increases the risk of falling into negative equity if house prices fall, Andrews said. “Buyers may be at risk if home prices fall more than 5%.”

The latest Nationwide figures show house prices continued to rise in May, albeit by just 0.3% in the month as demand slows.

Imogen Sporle, head of term finance at Finanze, said buyer interest is likely to wane due to strong consumer price growth: “I wholeheartedly agree that prices for real estate will soon collapse”.

But Lewis Shaw of Shaw Financial Services said the move to Halifax was a vote of confidence in the market: “It signals to me that everything could be fine.”

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