Today’s announcement that the Yorkshire Building Society is launching its own range of 95% loan-to value mortgages has been met with a mixture of opprobrium, hysteria and much teeth-sucking from the harbingers of doom. The main concern being voiced is that such lending will contribute to the country shouldering another burden of debt and it will be 2007 all over again. Let us make one thing clear: 95% mortgages have been around since the 1960’s and the era of mods, rockers, bell-bottoms and mohair suits. More pertinently, they didn’t cause a problem because they were used in conjunction with responsible lending. The financial catastrophe of 2007 was aided and abetted by irresponsible behaviour of the lenders. 125% mortgages, whereby the qualifying criteria was linked to your pulse rate (or even evidence that you had one), fuelled by the hunger of bankers selling securitised mortgages as investment vehicles, had no small part to play in the fiscal drama; they were actually jostling for lead billing. Ask Fannie Mae and Freddie Mac.
The ‘experts’ commenting in the media today, are convinced that small deposit mortgages i.e. 95%, will bring financial hardship to those who had foolishly succumbed to the advertising of the likes of the Yorkshire Building Society. Having lived through more than one financial crash, I am of the opinion that a correctly underwritten 95% mortgage is far less risky than a low loan-to-value mortgage taken out by someone who may have been somewhat disingenuous in revealing their actual income. I was always intrigued in the pre- August 2007 era of how many road-sweepers were on £150k annual salary. If you meet the criteria of a 90% loan-to-value mortgage, then the step to a 95% loan-to-value is not an unachievable target. That unused 5% invariably finds it way back into the local economy via carpet fitters, plumbers, tradesmen or even the local hostelry. The point is that the 5% is not saved or put away as it would be used in house in a bank or building society to protect their balance sheet. The feared 5% does not benefit the economy, it just makes the lender look healthier by increasing their cash reserves.
The best bit of financial advice that I ever heard being given to a first time buyer, (by a traditional old-fashioned bank manger of the type that no longer exists), was, “When buying your first home, always buy a house that you can’t quite afford” (sic). Why? Because it instilled in the borrower a sense of achievement, responsibility and satisfaction, when in 5 years time, the fruit of their labour to make the monthly payments was a house that was worth more than when it was purchased by them.
This week’s star Cheshire and Co Conundrum: name the first time buyer. There may be a prize, then again there may not.