This year has seen the return of higher loan-to-value mortgages, as more and more deals aimed at first-time buyers become available.
But an unpredictable housing market coupled with the often undesirable locations of affordable housing means that falling into negative equity is a real risk for buyers looking to take advantage of these deals.
The American dream
In the USA, a pioneering product has become widespread in the housing market, helping young buyers get their foot in the door and increasing home ownership in areas on the verge of collapse.
It’s called home equity protection, and is an idea for protecting the value of your home against any housing market declines between when the protection is purchased and the time when a home owner decides to sell – a lot like car depreciation insurance for your motor.
Linked to regional housing price indices, the product only pays out based on these statistics, not the actual buying and selling price of each specific home. So the payment may not match the actual difference in buying and selling price, but will still leave homeowners in a better position than if they had no protection in place.
In the United States, home equity protection is often included in the agreed down-payment for a house (typically from 1 to 3 per cent of the property value), and only becomes active and usable once the buyer has lived in the house for a pre-specified amount of time, to prevent them abusing the system.
Although the product is often offered by sellers as an incentive for purchase, buyers are not limited to obtaining the protection from the vendor’s estate agent and can shop around for a good deal.
Are we missing a trick?
This type of protection is not yet available on our side of the pond, so what’s stopping it being introduced and what sort of impact on the UK market would it have?
I spoke to David Hollingworth from broker London & Country Mortgages to find out why this little-known financial product has not been introduced in the UK and whether or not there is a need for it now.
He says: “Historically, there has not been any real need for a product like this, as housing markets have only really been moving one way – up. But in the current climate it could well be an inviting prospect for buyers. Those with high-value properties and nervous first-time buyers would see the most benefit from a product like this.
"But in the current market, next-time buyers, who are purchasing their second house and still carrying a high-value mortgage, and who are close to or in negative equity already might also feel more comfortable with some form of home equity protection in place.”
What do you think of the idea? Are you apprehensive about entering the property market due to fluctuating prices? Is there a place for a product like this in the UK market, or is extra expense in the home-buying process the last thing we need? We’d love to hear your opinions on the subject in the comments section below.
