House-price bubble fears over 95% mortgages

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The Government came under fire this week for backing 95 per cent loan-to-value mortgages.

Critics said they could create a house-price bubble at a time when property values are climbing at their fastest rate for three years.

The concern is that should support be withdrawn and prices drop, buyers will quickly fall into negative equity. Because they have such small deposits – of just 5 per cent – they will be left with mortgages that are larger than the value of their homes.

But Chancellor George Osborne defended the high loan-to-value deals, saying that they are not "exotic weapons of financial mass destruction".

Ben Thompson, managing director of the Legal & General Mortgage Club, goes further. He believes the growing availability of 95 per cent mortgages is an encouraging sign: "They show that confidence is returning to the housing market and Government initiatives, such as FLS (Funding for Lending scheme) , are starting to make an impact.

"As long as higher loan-to-value deals are given to those who can meet repayments it shows that lenders are doing their part to open up the mortgage market to first-time buyers and those with smaller deposits," he said.

Mr Thompson says a healthy property market needs different mortgages available as well as a consistent supply of housing, particularly outside the south.

"It is important to consider the regional picture," he pointed out. "While London and the south-east have seen continued growth, across the country this is not the case with house prices stalling in some areas.