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Written by Mark Burton
Know Your Money editor

Debate over the return of the high loan-to-value (LTV) mortgage has been raging this month after Nationwide Building Society announced that it is introducing a 125 per cent LTV product to customers experiencing mortgage stress.

Although the product is not widely available, the announcement has drawn criticism and praise alike as some parties herald the end of the property slump and other warn that more caution is needed.

Why all the commotion?

LTV ratios have come under close scrutiny since the onset of the economic crisis and many critics of high LTVs have for years been warning that they could end up putting homeowners under unmanageable financial strain and cause serious problems for the housing industry.

Prior to the economic crisis, many mortgage companies were happy to hand out mortgages worth up to 100 per cent of the value of the property, while it was even more common for buyers to only need to stump up ten per cent or less of the value of a property to be approved for a mortgage.

However, many experts began to point to the problems seen in the US housing market as evidence that offering large loans without due caution could lead to a raft of repossessions, particularly if homeowners' financial circumstances changed.

As the credit crunch squeezed tighter throughout 2008, maximum LTVs available to most borrowers dropped to around 75 per cent as banks and other lenders became ever more cautious of taking more debt.

Then, with the UK economy plunged deeper into crisis by the collapse of Lehman Brothers and other major financial institutions towards the end of the year, it looked like the days of the high LTV were well and truly over.

Indeed, earlier this year, Gordon Brown called for new measures that would ban 100 per cent LTVs in a bid to prevent people taking on loans they cannot afford.

So will they make a comeback?

In practical terms, it is unlikely that lenders will begin rolling out 100 per cent LTVs for many months to come, or at all if the prime minister's proposals are backed by his fellow MPs.

Furthermore, it is important to note that while Nationwide's new mortgage has attracted a lot of interest in the press, it is a very restricted product that will only be made available to people experiencing acute mortgage stress.

The Nationwide loan works by offering those people who already own a property but are in negative equity - where their home is worth less than the mortgage they took out on it - the opportunity to repay their existing loan without being repossessed.

In making the product available, Nationwide was at pains to explain that it would only be available to mortgage holders who are in negative equity, need to move home, meet strict lending criteria and have a good credit record.

So while the product can hardly be said to represent a return to high LTVs for the wider market, there has been a gradual loosening in lending criteria seen in recent months and some providers are now offering mortgages with an LTV of between 85 per cent and 90 per cent.

It is these products that may come under fire if Mr Brown's plans are given the go-ahead.

Is that likely?

It certainly appears to be less likely than it was when the prime minister first unveiled the plan in February. The proposals have drawn criticism on two grounds, firstly that they may halt any recovery in the housing market and secondly that banning high LTVs is unnecessary in the current climate.

Speaking to the Guardian, an anonymous government source explained the second point, claiming: "At the moment it's difficult to get even a 70 per cent mortgage; [high-risk loans] are not really a problem. We haven't exactly got lots of people rushing out and getting them."

And it is this last aspect that is proving most important for many involved in the debate, as while it is vital to remember the problems caused by reckless lending, many feel that there are equally dire consequences for a housing market where it is impossible for most people to get a mortgage.

There has been particular concern that blocking high LTVs will effectively shut out first-time buyers from the market, thereby slowing down home sales as long chains of sellers develop, with homeowners unable to buy a new property until they have sold their own, and with no new first-time buyers to get the wheels moving.

To compare the latest mortgage rates from leading UK lenders click here.

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