Sean Oldfield is the chief executive officer at Castle Trust
New high loan to value mortgage products seem to be entering the market all the time.
A year ago, as the “post-recession” caution of lenders began to weaken, we were hearing of 85% and 90% deals. Today you won’t have to look very far to find a 95% loan.
On one hand, this provides consumers with choice and enables more buyers to get a foot up on the property ladder.
But the big concern is that it increases risk to the both the lender and the homeowner. This is exactly what the entire industry – from borrowers, lenders and developers to regulators, government and the third Sector – wants to avoid.
And it’s certainly an issue we at Castle Trust aim to mitigate against.
A mortgage is a form of leverage and any form of leverage increases your profits if your home increases in value and increase your losses if your home falls in value.
A randomly selected home in the UK has a one in six chance of falling more than 20% over an average five year period, while house prices in general are expected to rise. This means that even if you have a 20% deposit, there is a one in six chance of losing all your original equity over five years. For those with a 10% deposit, the chance of losing all your original equity climbs to one in four.
Anyone assessing risk by using these numbers might be surprised but they might also underestimate the probability of things going wrong for them because they assume that house prices will continue to trend upwards and, anyway, we all like to think that our own home will outperform the average.
Of course, the risk rises still higher if house price inflation is expected to be lower even negative.
When you couple this with the fact that most people borrow between 60% and 80% of their home’s value, you realise that there is a lot of risk in using the higher LTV products.
Risk-reduction is central to what we do at Castle Trust. For those who don’t know our Partnership Mortgages, which we plan to offer once we are authorised, they are 20% loans alongside a 20% (or greater) deposit and a 60% (or smaller) traditional repayment mortgage.
There are no monthly commitments, allowing borrowers to save on average around a third of the monthly commitments when buying their home. We will not lend to homebuyers who would not qualify for a full 80% repayment mortgage, so we are not in the business of helping home buyers push themselves further than they could otherwise.
Risk reduction is the name of the game with shared equity products like ours. They reduce the risk of repossession and arrears – a problem that will only get worse as mortgage rates rise – because borrowers have lower monthly commitments to maintain their mortgages.
They also reduce the risk of negative equity and reduce the borrower’s exposure to rising interest rates.
Lenders and house buyers need to strike a balance between reducing risk and cutting too many borrowers out of the market by maximum LTV’s being too low. This is an innovation that aims to fill that need.