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Mortgage lenders tighten their belts

With expectations of a housing market slowdown this year, it seems that mortgage lenders have started to take a more cautious approach to ensure their fingers don’t get burnt. The latest market analysis from Moneyfacts.co.uk highlights the current trend for mortgage lenders to be reducing their maximum loan to values.

Moneyfacts.co.uk has found that since the beginning of December 11 mortgage lenders have reduced the maximum loan to value (“LTV”) they offer on some or all of their mortgage range. This is an understandable about turn from the mortgage lending strategies we have witnessed over the last five years or so, when mortgage lenders pushed loan to values to highs of 130%, with 95% mortgage products considered the norm.

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Changes in December 2007

• Alliance and Leicester - All 95% LTV products reduced to 90%
• Cumberland BS - No longer offers 100% LTV mortgage
• Manchester BS - Short term products – LTV reduced from 85% to 80%
• Yorkshire BS - No longer offers 100% LTV, others reduced from 90% to 75%
• Scottish Widows Bank - All flexible products LTV reduced from 95% to 90%
• Newcastle BS - 100% LTV product only available with guarantor mortgages

Changes in January 2008

• Barnsley BS - All products – LTV reduced from 95% to 90%
• Britannia BS - All products – LTV reduced from 95% to 90%
• Cheltenham and Gloucester – LTV for all ‘caseflow’ products reduced 75%
• Egg - All products – LTV reduced from 95% to 90%
• Pi - All products - LTV reduced from 95% to 90%

Since June 2007 ten mortgage lenders have stopped selling 100% loan to value mortgage deals, leaving today’s mortgage market served by just 22 lenders. Others such as Newcastle BS and Scottish Widows Bank have restricted 100% mortgage products to guarantors or professionals respectively, both presenting lower risk profiles.

It is not hard to understand why this pattern has emerged. With mounting evidence that housing prices are cooling, combined with the increasing number of borrowers facing debt problems, it is not welcome news for those consumers with only a small amount of equity.

This more cautious approach of mortgage lenders starting to reduce their exposure to the property price fluctuations shows that they have a real concern over the future of the UK housing market. A case of negative equity is bad news for both the borrower and the mortgage lender.

Should this conservative approach continue, borrowers who come to the end of a mortgage deal but find themselves still borrowing at a high loan to value ratio could find the choice of deals limited, or may be forced to pay a much higher price.

Along with the drastic reduction in sub prime mortgages reported at the end of last year these changes once again will impact those on the limits of affordability. Perhaps a sign that the ‘live now pay later’ culture that we saw take over in 2007 may gradually be coming to an end.

Anyone looking to take their first step onto the property ladder should carefully consider the risks of taking a high loan to value mortgage product. Plan and save for a deposit, as not only will it offer a buffer against price fluctuations, but your interest bill in the long term will be much lower.

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