- HSBC Holdings Plc has decided to stop offering lower deposit mortgages
- Finding lower deposit mortgage is like finding a needle in a haystack
- Maximum LTV of 75 per cent is standard across the industry and Nationwide Building Society is still offering higher LTV products
In a recent blow to homebuyers, UK’s leading bank, HSBC Holdings Plc (LON: HSBA) has decided to limit offering lower deposit mortgages which indirectly mean higher Loan-to-Value mortgages. These mortgages offer up to 90 per cent of finance for buying home.
Buying a home is a dream which is shared by all, however, not everyone is able to own one. Most of the people struggle even for the initial deposit amount (down payment), which is a pre-requisite in most of the cases to apply for a mortgage.
Why is HSBC refraining from offering Low-Deposit Mortgages?
According to media reports, the leading bank has stopped offering this product because of the unprecedented surge in low-deposit mortgage applications. There is a huge backlog which the bank needs to get rid of. The bank believes that processing these many applications would certainly affect the service quality, and which could lead to a bad experience for its customers.
Let us understand through an example, how a mortgage works. The house which the applicant is willing to buy costs £100 thousand in the property market. He has a savings of £25 thousand which he is willing to pay as a deposit (down payment) or equity. The remaining £75 thousand is the loan amount or loan-to-value (LTV).
Therefore, the applicant in this example would be paying £25 thousand as a deposit, which means that the bank would be financing the remaining £75 thousand of the value of the asset. The lesser the mortgage, the more stringent it gets to avail the loan. Moreover, a higher LTV would translate to higher risk for banks, which would eventually lead to higher interest rates being charged by the lenders.
A few months ago, HSBC reportedly put aside £8.8 billion to cover bad debts as it has been difficult to assess the impact of the economic fallout caused by the coronavirus pandemic. Meanwhile, the bank has been struggling to cope with geopolitical tensions amid China and the United States.
Why banks encourage lower LTV products?
After the financial crisis (2007-08), LTV offered by the financial institutions became lower due to lessons learnt by the lenders. If the value of the asset goes below the LTV (money put in by the banks), a bubble is created. This bubble is also known as negative equity.
Therefore, to mitigate some amount of risk, the lender encourages the loan applicant for a higher deposit mortgage, and this has been the trend which has been prevalent across the industry for last many years.
Is there any hope for First-Time Homebuyers seeking low-deposit mortgages?
It is not easy to find a higher LTV product (more than 85 per cent) in the mortgage market. Most of the lenders offer only 75 per cent of LTV. There is still an option of finding a higher LTV product, however, its like finding a needle in a haystack.
The Chancellor announced the stamp duty move in his summer statement recently. Soon after which Nationwide Building Society announced lower deposit mortgages. Rishi Sunak had announced a stamp duty holiday on all property purchases (up to £500,000) in England and Northern Ireland.
Earlier in June, Nationwide Building Society capped its maximum loan-to-value (LTV) at 90 per cent for first-time buyers in anticipation of surge in mortgage applications by potential buyers. The company offered a maximum LTV of 75 per cent on newly constructed properties and 85 per cent for subsequent buyers.
Basic eligibility for Nationwide Building Society mortgage scheme
- The company would lend to people who are financially sound and have proof of income.
- UK lender has placed a comprehensive system of checks and balances before disbursing loans to eligible homebuyers.
- The age of the property must be at least two years or more which the first-time buyers intend to buy.
- The initial down payment made for loan application could not be a gift from family or relatives.
- The homebuyers would be subjected to credit checks.
A lower deposit mortgage scheme might sound very enticing for customers but could become a burden for the lenders. In addition, given the geopolitical challenges such as Brexit, asset pricing does not seem to be stable. Therefore, banks are following a more prudent approach in terms of mortgage financing. Banks have already piled on a lot of debt amid the crisis induced by the coronavirus pandemic. It is imperative of lenders to take a prudent approach in these tough times.