For the first time since the financial crash in 2008, UK lenders have started offering mortgages for up to 5.5 times a borrower’s salary.
The new loans will allow homeowners to borrow substantially more than the previously recommended guideline of only three to four times annual income.
These 95% LTV – or ‘loan to value’ – mortgages mean borrowers may only need to save 5% of the value of their home as their deposit.
Widespread adoption of these types of mortgages could help thousands of first-time buyers to get onto the housing ladder, however, there are dangers, market commentators believe.
Help to Buy and 95% mortgages
According to Which?, almost 160,000 people, including more than 128,000 first time buyers, used Help to Buy equity loans to purchase their properties in 2017.
This government scheme provides those buying their first or next home with an equity loan of 20% of the value of the property in the UK and a 40% loan for those in London.
This means, if would-be homeowners secure a 75% mortgage from their chosen lender, then borrowers only need to save a 5% deposit for their home.
While the scheme helps thousands of buyers to access better rates from their mortgage providers, Help to Buy only applies to new-build homes worth £600,000 or under.
The scheme’s 20% or 40% equity loan then begin to attract interest after five years.
For those looking to purchase older properties in the UK, 95% mortgages require the same level of deposit, in effect, as the Help to Buy scheme.
Unlike the government’s loans to help buyers move up the property ladder, 95% LTV loans are set by individual lenders.
A number of lenders have begun offering higher LTV loans in recent years, including HSBC, Aldermore, and Skipton Building Society at 95% LTV and Secure Trust Bank and Yorkshire Building Society at 90% of the value of the property.
The dangers of high LTV mortgages
Mortgages at 95% of a property’s value aren’t anything new.
Following the financial crash however, these types of loans to first-time buyers simply disappeared. 100% and 95% loans were dropped and buyers were required to put down much larger deposits in order to buy their home.
High loan-to-value mortgages are also seen as high risk during a housing crisis. For example, a home worth £200,000 with a mortgage of £150,000 has a loan to value of 75%. This leaves £50,000 on the property as equity.
Should house prices plummet and the value of the property drop to £150,000, then the loan to value would rise to 100%.
If house prices were to fall further the homeowner would be in negative equity – meaning they have a higher mortgage than the property is really worth.
In the now-defunct Financial Services Authority’s “Responsible Lending” report of 2010, the regulator concluded that the loan to value ratio of a mortgage was a “relatively consistent predictor of default”.
Who qualifies for a 95% mortgage?
While many lenders have eased their lending restrictions recently, none have gone so far as Clydesdale Bank.
The firm recently announced that they will grant first-time buyers mortgages of up to 5.5 times the borrower’s annual income up to a maximum of £600,000.
Their deal also requires that first-time buyers will only need to save 5% towards their deposit to access higher value properties.
Other lenders now use affordability tests to judge mortgage applications which equate to salary multiples.
Nationwide will lend up to 4.75 times a borrower’s income where Lloyds will go up to five times a person’s salary up to maximum of £500,000 on a 75% LTV mortgage.
David Blake from Which?
Mortgage Advisers says the main benefit of 95% mortgages “is that those who qualify can borrow up to 5.5 times their income. It’s important to remember, however, that all loans are subject to an affordability assessment, so this is not guaranteed for all borrowers.”
The bank have said that their 95% LTV loans will only be available to ‘professionals’ such as accountants, architects, dentists, doctors, pilots, and solicitors earning at least £40,000 that have qualified in the last five years.
David Hollingworth of London & Country said the most important this is “being able to lend borrowers the amount that they can demonstrate will be affordable and to keep a degree of flexibility where appropriate, rather than a move to remove the reins on what a lender is prepared to lend.”