The accelerated launch of the Help to Buy scheme has caught the imagination of the media.
The scheme supports higher loan to value (LTV) mortgage lending by putting Government-backed security alongside buyers’ deposits. The idea is to convince lenders their own lending is safe.
This fanfare hides the fact that mortgages for 95 per cent LTV are already in the market. Lenders have become more comfortable that, for sound borrowers with an equity stake of 5-10 per cent, a properly-priced loan once again represents a reasonable risk.
I say “again” because we have been here before.
Pre-crunch, the most notable high LTV lender was Northern Rock with its Together product which linked a mortgage and unsecured loan into a 125 per cent LTV deal (e.g. a £125k loan on a house worth £100k).
The self-same Rock led the way into the abyss and soon found that borrowers who have little stake money are apt to walk when negative equity and payment difficulties conjoin. It is this history lesson that Help to Buy’s critics cite as the danger of excessive stimulus of the housing market in 2013.
But actually, the conditions are strikingly different. Total net lending – the amount by which new lending exceeds debt being repaid – has been running at a very small proportion (less than 10 per cent) of its pre- crunch levels.
Admittedly, the culture of re-mortgaging to repay card debt by borrowing more, once rife, has disappeared.
Even allowing for that you have to go back perhaps 25 years to see numbers as low as recent net lending values.
Many banks have been “repairing their balance sheets” which meant less lending.
Nearly five years of record-low base rate did little to stimulate activity and it is only recently the Funding for Lending scheme and now, potentially, Help to Buy mean lenders will feel happy growing their loan books.
Of course, if you are reading this in Carlisle (not sure the Mail sells many copies there) you will wonder what the talk of a housing bubble is all about. The regions remain stubbornly cool and unmoved while London market simmers in a rolling boil.
Economists have a theoretical answer, which is regional house price inflation “caps” to suppress lending in hot spots while relaxing mortgage rules elsewhere.
I am doubtful this would work, but the sentiment is right. Exaggerated cycles of house price rises and falls are dysfunctional but we are still a long way from this and Help to Buy is welcomed.
Market Thoughts column by Mark Robinson, the chief executive of Market Harborough Building Society.
For more details about the society, visit its website at www.mhbs.co.uk.
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