100% Plus Mortgages Could Be In Trouble
Following the announcement by several mortgage lenders to end their 125% mortgage deals, fears are now mounting for thousands of homeowners who borrowed more than the cost of their home.
Just last week Alliance & Leicester, Abbey, Coventry Building Society, Godiva and now Northern Rock said they had no other option but to cease their 125% home loans as a result of the slowdown in the property market and falling house prices.
Typically a 125% home loan offers up to 95% of the value of the home like a traditional mortgage and an additional 30% on top as unsecured personal loan. They became increasingly popular last year, particularly amongst first-time buyers when house prices were rising. Thousands signed up for this type of mortgage deal with the approach that increased property prices would help them pay off the large amount they had borrowed.
Now that lenders are scrapping these 100% deals first-time buyers, particularly young people with little or no deposit, will now severely struggle to step foot on the property ladder.
Recent figures have shown a decline in house prices over the past few months and the general outlook for 2008 is that the property market will be flat. Only one lender continues to offer the 125% home loan, narrowing the mortgage possibility for thousands of first-time buyers considerably.
Melanie Bien, director at independent mortgage broker Savills Private Finance said:
"When there's double-digit house-price growth, it doesn't matter so much if you take on a relatively high LTV (loan-to-value) because by the time you come to re-mortgage, your LTV will have effectively fallen because you will have more equity in your home."
She added: "But if you borrow the full amount or more than the value of your home and house prices don't rise, or even worse fall, you could have even more negative equity when you come to re-mortgage. And if fewer lenders will look at this sort of business, you could be in trouble."
Even the standard 100% home loan is now under threat and has already become increasingly more expensive not to mention harder to find.
Technical manager at independent broker John Charcol, Ms Katie Tucker said:
"It looks as though mortgages over 100 percent will have gone the way of the dodo by the end of this week."
Ms Tucker explained that people with existing mortgages of more than 100% Loan-To-Value should try to overpay as much as possible before their current mortgage deal expires.
"Their chances of having a re-mortgage option when the time comes are slim," she said.
At present Birmingham Midshires Solutions is the only lender in the market and lends solely through intermediaries. Just three months ago 41 of 123 prime mortgage lenders offered 100% plus loans but with a third having since withdrawn their products, only 28 providers currently remain.
The withdrawal of 100% plus home loans is merely yet another example of how far lenders are prepared to go to further tighten their lending criteria. Today's mortgage market is becoming almost unrecognisable when compared to how it was this time last year.
Those who will be most affected by such vast changes in the mortgage market are prospective first-time buyers. Without a deposit not only do they now have fewer options available, but they will also be forced to pay a much higher premium for the added risk that the lender is taking on.
Published on February 26, 2008
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