It's no secret that the frankly outrageous lending practices of yesteryear helped create the miserable situation we currently find ourselves in.
In a bid to sustain the meteoric rise in house prices, banks implemented a policy of throwing money at anyone who walked through their doors, regardless of their financial situation.
It was a truly crazy time in the market, culminating in the 125% loan to value (LTV)
mortgage offer.
Have we become too risk averse?
Fast forward to 2009 and we're still paying the price for those reckless decisions, so it is perhaps unsurprising that we have become extremely risk averse.
In today's market, a first time buyer must produce a sizeable deposit just to qualify, but if you want the best rates you'll need to come up with 40% of the home's value.
Anyone unable to meet the strict lending criteria is deemed too high risk and is simply turned away. Now I'm not going to argue that prudence is a bad thing, but I can't help but feel some lenders are too quick in writing off certain products.
I'm talking specifically about the 95% LTV
mortgage. The mere mention of this product leads to allegations that we're simply heading back to the days of irresponsible lending, but is this always the case?
A practical example
In London, a first time buyer can easily be expected to pay £260,000 for their first home/closet above a chippie. On such a property, our FTB on a 95% LTV deal would need to come up with a deposit of £13,000.
But of course the costs don't stop there. A house at this price will be hit with 3% stamp duty, so that's another £7,800 he/she will have to come up with.
Then there is the £1,000
mortgage arrangement fee, the solicitors bill of at least £1,000 plus a host of other costs and soon we see the bill is actually closer to £25,000.
Now I personally feel that anyone who has the financial acuity to have squirrelled away that sum of money should not simply be labelled too risky to take on.
Limited deals available
Of course borrowing at 95% LTV should come at a premium, but at the moment most there are so few of these deals on offer (and many of these are limited to existing
mortgage customers) that for many buyers it isn't even an option.
Opening up the high LTV end of the market up would certainly help oil the wheels of the housing market and increase the number of FTBs climbing onto the property ladder.
Clydesdale Bank is one of those still offering such deals to FTBs. The bank insists it adheres to responsible lending practices, bringing buyers in for interviews with advisers and manually underwriting all applications.
House prices won't fall forever
Some analysts have criticised the bank for its refusal to pull the deals, but I think that increased choice for FTBs is never a bad thing – provided it is done responsibly.
One of the key complaints about such
mortgages is that, with house prices falling, long term negative equity is a certainty for anyone with a small deposit.
While it's true that prices are coming down, hopes are growing that things will bottom out towards the end of the year and start rising in 2010, so it's perhaps not quite so clear cut as that.
