With the average first time buyer property now in excess of £152,000, buyers are forced to turn to greater levels of borrowing in order to get onto the property ladder. Comparing the first nine months of 2005 with the first nine months of 2006, MAB figures reveal a 25 per cent increase in those taking 100 per cent loan-to-value (LTV) mortgages and a 70 per cent increase in the number of borrowers opting for mortgages in excess of 100 per cent LTV.
The number of people taking 100 per cent plus LTV mortgages accounted for 8 per cent of all MAB cases in the first nine months of 2006 compared to 7 per cent in the first nine months of 2005. The number of cases of 100 per cent LTV mortgages has remained at 3 per cent for both periods. However, the figures also show that over 11 per cent of all MAB cases are now concerned with those wishing to borrow the entire value of their property or more. These figures highlight the greater measures now available to first-time buyers to secure their first home, if they do not have the means to save for a suitable deposit.
Such increases in high LTV mortgages are often criticised for irresponsible lending. However, Mortgage Advice Bureau stress the increasing necessity and advantage of these products for would be buyers.
Almost all first-time buyers take heed of advice to save for a deposit to their first home. However, with house price inflation and rental costs increasing many first time buyers are finding it difficult to save at an equivocal level. By opting for a 100 per cent LTV these buyers can secure their first home and immediately begin repayments often similar to the amount they were already previously paying in rent.
Other first-time buyers, MAB reports, choose to take 100 per cent LTV mortgages to preserve their own capital. These buyers may have enough saved for a small deposit towards their first home yet have purposefully chosen not to commit their own money. These buyers are then able to comfortably afford their mortgage repayments whilst using saved capital to fund additional costs at the outset, for example, decorating or furnishing their new property.
However, considerations still need to be made when opting for these products.
MAB advise buyers that these products often carry a higher interest rate of at least 1 per cent more than other mortgages and high lending charges can add another £2,000 – 3,000, which will increase the interest paid on the loan. Finally, with a 100 per cent LTV 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, and the buyer will remain responsible for paying the lender any shortfall.
Brian Murphy, lending manager, Mortgage Advice Bureau, commented: “With increasing numbers of mortgage products targeted at first-time buyers and promising to make the first step onto the property ladder easier the incentive to borrow more than the value of the home they desire is becoming a very appealing solution.
“Many in the market still view these products as the final resort for mortgage borrowing. However, as examples above demonstrate, these mortgages offer a very real solution for first-time buyers who stand little hope of entering the housing market without them and offer an alternative arrangement for those who wish to preserve some of their own capital without using it as a deposit. Whilst some caution should be taken when considering borrowing this amount, a visit to an independent broker such as MAB can ensure that the individual embarks upon a mortgage deal that they will be comfortably able to repay.”
