The Mortgage Advice Bureau has found that the number of buyers who took out 100 per cent LTV mortgages in the first nine months of Q3 had more than doubled compared with the same time in 2006.
First-time buyers are thought to be the root of this upsurge.
In September 2006, Council of Mortgage Lenders' figures showed the average first-time buyer mortgage was £108,917 and first-time buyers could obtain a two-year fixed rate mortgage at around 4.89 per cent, which translates into a monthly interest only payment of £443.
However, by September 2007, the average first-time buyer mortgage had risen to £116,604 and the typical two-year fixed mortgage is now priced at around 5.79 per cent. This mortgage arrangement results in a monthly interest only payment of £562 – an increase of more than 26 per cent on the September 2006 figure. These steep rises have forced first time buyers to borrow increasingly greater amounts in their quest to buy their first home.
100 per cent mortgage products are clearly growing in popularity, and their increased demand indicates that borrowers have faced growing problems when attempting to enter the housing market.
Firstly, these products often carry a higher interest rate of at least 1 per cent more than other mortgages and higher lending charges often apply, adding another £2,000 – 3,000, which will increase the interest paid on the loan.
Also, with a 100 per cent mortgage, the buyer has no equity to fall back on should the price of the property, achieved in a forced sale scenario, fall below the price paid for it originally. In this scenario, the buyer will remain responsible for paying the lender any shortfall.
Brian Murphy, head of lending at Mortgage Advice Bureau, commented: “The need for 100 per cent LTV mortgages has never been more apparent than over the past year. However, with current climate conditions and the initial signs of house price stabilisation there might be a glimmer of hope for these buyers.
"If the disparity between earnings and house prices begins to correct and savings become available for deposits then the number of 100 per cent LTV will potentially start to decline.
“This situation however is a long way from reality and until this time, 100 per cent plus mortgages offer a real opportunity for buyers to finance the purchase of their property.
