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Is it time to abolish 100% mortgages, as Gordon Brown believes?
Yes, says Jeremy Browne, Liberal Democrat chief secretary to the Treasury spokesman
In the current housing market, with prices falling steadily, the 100% mortgage is an insane risk for any lender. Before the buyer had even moved the furniture into the property, the value of the asset would be less than the debt. There are many homeowners with mortgages worth 80% of the peak property value who are worried about negative equity, let alone those on 100% mortgages.
The market also has further to fall. I say this not as an economic forecaster but as an observer of consumer demand. If buyers thought we were about to turn the corner and the best property bargains were to be had now, estate agents would be flooded with sharp-elbowed customers. Customers are voting with their chequebooks (or abstaining from voting, for the time being).
Unemployment, which is rising fast, has always put downward pressure on house prices, too - particularly when the biggest job losses are in middle-class professions in the south-east.
Government action to curb irresponsible mortgage lending would have been more useful when Gordon Brown was chancellor. As it is, any aspiring homebuyer would be hard-pressed to find a 100% mortgage in the current market. If anything, the criticism now is that the banks, having got their fingers badly burnt, are excessively cautious. Nevertheless, most people would surely accept that we need to restore greater responsibility to money lending.
So Brown's initiative, although sensible, is somewhat redundant. There might be some imprudent demand for 100% mortgages, but there is no supply in a realistic marketplace. Would you sell a 100% mortgage to a customer and take on the risk of their negative equity? Me neither, unless he had additional financial support - and I would prefer to see that materialise in the form of a deposit.
If this sounds unsympathetic to first-time buyers, it is not meant to be. I understand and share their aspirations, so let me make three points to them. First, act rationally. Owning a home is a British dream. When commentators argue for a bigger rental sector, I always ask them if they own their own home. They invariably do, and they should avoid hypocrisy. Buying a property remains a rite-of-passage for many people and one of the milestones in life.
But, just because a dream home becomes available, no buyer should suspend his or her financial judgment. Other government policies are trying to suck new buyers into a falling market. There is a real risk that many of them will be the economic victims of tomorrow. There will still be dream homes for sale in the future, and at lower prices.
Second, although I regard 100% mortgages as too high, a danger now is that banks overcompensate for their previous bad judgment.
Demands for an enormous deposit are an almost impossible barrier to entering the market for first-time buyers. Just as the price of housing becomes more affordable, and interest rates fall dramatically, the availability of mortgages dries up. That is bad for the would-be buyer, but it also has a detrimental knock-on impact throughout the housing market.
Over the past decade, credit was allowed to run out of control in Britain, and the consequences are increasingly apparent. We need to step back and find the right balance - even if the need for caution seems boring after the instant gratification of recent years.
No, says Karen Dugdale, homeowner
After the last UK housing "boom and bust" in the early 1990s, my partner, son and I were living in a heavily-subsidised two-bedroom company-let in a 1930s block in Hackney.
Taking out a mortgage never crossed our minds until a job change meant we had to move out.
With no savings, a young child and only one of us permanently employed - I was on a temporary contract - we ruled out buying. The main reason: we had no deposit.
It was a chance remark by my mother, who worked in a building society, that alerted us to 100% mortgages. She suggested approaching the Royal Bank of Scotland, one of the few lenders still offering them. I didn't hold out much hope. This was a time, like now, when lenders were limiting products and exercising caution following the boom and bust years.
Looking back (and having arranged a subsequent mortgage over the phone since) it wasn't simply a case of ask and get; we had to physically go to the branch for various meetings with both a bank manager and mortgage advisers who went through our finances with alarming thoroughness. In our favour: we had no outstanding debts and a steady, albeit fairly modest, income.
Following the rigorous application procedure, we were offered a 100% mortgage amounting to three times my partner's salary - mine, being temporary, wasn't taken into account - on a three-year fixed rate, slightly higher than the standard variable rate. Despite the "loaded package", we accepted; our only alternative, given that we were not eligible for social housing, was renting on the open market.
Our circumstances mirror those of many first-time buyers now. Rents, especially in the south-east, remain high, and with interest rates at a record low it can make more economic sense to buy. You have to pay to live somewhere and, if you can prove that you are already meeting a higher rent, where is the added risk to lenders? Yes, interest rates will inevitably rise, but it's about exercising common sense and setting parameters (lenders) and managing realistic expectations (borrowers).
We were offered £67,000 - at that time enough for a two-bedroom garden maisonette in Dalston, east London. We wanted £75,000 for a three-bedroom Victorian terrace in the more affluent Stoke Newington.
I'm glad the bank refused our aspirational wants because we would have been seriously stretched. The three-year deal meant we knew exactly what we had to pay over a period of time, and we could budget accordingly, looking for a more competitive package when the "probationary" period was up.
The average deposit put down by first-time buyers now is 18%, the highest in 35 years. First-time buyers are crucial to getting the housing market moving and it is unrealistic to expect a hefty deposit with rate cuts benefiting existing borrowers, not savers.
Affordable 100% mortgages have no direct bearing on rising repossessions, which are more linked to a change in circumstances affecting income.
First-time buyers have historically benefited from 100% mortgages, myself included. To take away that lifeline now is a knee-jerk reaction that can surely only further hinder an already stagnant market.
• What do you think? Is it irresponsible for financial institutions to lend 100% mortgages in the current climate? Or are you a first time-buyer who needs access to this kind of loan?
Write to Cash, The Observer, Kings Place, 90 York Way, London N1 9GU, email cash@observer.co.uk
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