Ross Clark

Will 95 per cent mortgages really help first-time buyers?

  • From Spectator Life

Did we end up learning anything from the 2008/09 financial crisis? If we did, we seem to have forgotten it pretty quickly again, to judge by the re-emergence of the 95 per cent mortgage. Numerous deals have been launched over the past week, with interest rates of around four per cent – the result of the Chancellor’s Budget initiative for the government to underwrite such loans.

If you can sum up what went wrong in the late 2000s in one sentence it is that in their determination to grow their share of the mortgage market, banks overlooked that fact that it takes very little to turn a secured loan into an unsecured one. It ought to be obvious that if you buy a property with a 95 per cent loan-to-value mortgage, a mere five per cent fall in the value of your home will wipe out all the equity which you have out into it. That is not just a problem for you but a problem for your mortgage-lender, too, who advanced you your loan in the basis that it could repossess your home in the event of you defaulting on your mortgage repayments and sell off the property without making a loss. Had the mortgage-lender not been confident of doing this, then it would not have offered you the loan, or at least not at such an advantageous interest rate – you would have had to pay the sort of rate you pay on your credit card, the loan you used to buy your car, or other such unsecured loan.

Property might seem a relatively stable investment compared with the stockmarket, which typically will go up and down by a per cent or so in a single day.

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