People's bank is welcome, but be careful on 90% mortgages

by Ed Bowsher on 29 March 2010  |  0 comments
Tweet

I'm pleased the Post Office is moving more aggressively into banking, but the new 'People's Bank' mustn't get carried away.

A big theme of the next few years will be increasing competition in the banking market. We’re going to see new entrants such as Metro Bank and Virgin. Tesco is going to ramp up its presence in this market with a current account, and both RBS and Lloyds are being forced to sell off some of their branches.

Well, today we learned that the Post Office also wants to join the fun. Press reports say that the Post Office will launch its own current account within the next year and it will also offer a savings account that is part of the savings gateway scheme. The gateway means that people on low incomes can get 50% top-ups for their savings from the government. The Post Office hopes to become a ‘peoples’ bank.

To be clear, the Post Office already offers a savings account and some mortgages but today’s move is welcome nonetheless. By offering a current account, the Post Office is signalling that it wants to become a serious player in the banking market and I see that as a good thing.

However, I am a bit worried about one piece of news. The Post Office is also planning to launch a mortgage for people who only have a 10% deposit – also known as 90% loan-to-value (LTV.) I’ve got no problem with the 90% mortgage itself. I think it’s reasonable to have mortgages at that level – they make it easier for first-time buyers to get their foot on the ladder.

My concern is that the Post Office might get carried away and offer 95% or 100% mortgages. I dislike 100% mortgages because I think they would do more harm than good. They’d provide an unhelpful stimulus to the housing market – young people above all else need cheaper house prices – and it’s also a risky move for the borrower. If you take out a 100% mortgage, the chances of you going into negative equity are way too high for my liking.