Lenders lowering mortgage thresholds could cause a market crash experts warn

Lenders lowering mortgage thresholds could cause a market crash experts warn

Roger Pettingell Sarasota Real Estate

It is just one more indication of the problems around trying to solve the chronic housing shortage.

Another is that the spectre of negative equity is stalking the market again as lenders start to offer riskier mortgages at the same time as price growth slows.

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

It will also hike LTVs on housing association shared ownership properties, so that first-time buyers only need a 5 per cent deposit.

Yet experts say letting someone buy a £289,099 home with a £4,000 deposit could backfire as inflation rockets, 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.

Approximately 1.8 million homeowners suffered negative equity in the early 1990s after house prices crashed. Many were unable to move house as they could not raise the money to clear their debt.

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

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

One in 10 new-build owners sold their property for less than they paid for it in 2020, says Hamptons International.

Yet Halifax is taking the plunge. Andrew Mason, head of strategic partnerships and housing, said it will support the new-build market: “Getting a deposit remains the biggest hurdle for most first-time buyers.”

Andrews, managing director at KIS Finance, said many firsttime buyers will welcome only having to save a 5 per cent deposit instead of the usual 10 or 15 per cent.

But she warned that high-LTV loans typically mean borrowing more money at a higher rate of interest: “With living costs showing no signs of easing, some people could get into trouble.”

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

Latest Nationwide figures show house prices continued to grow in May, although by just 0.3 per cent over the month as demand slows.

Imogen Sporle, head of term finance at Finanze, said buyer interest is set to cool due to high consumer price growth: “I am fully subscribed to the idea of house prices crashing soon.”

But Lewis Shaw, of Shaw Financial Services, said the Halifax move is a vote of confidence in the market: “It signals to me that it might just be all right.”

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