The past few weeks have seen a number of 100 per cent and 100 per cent plus loans coming on to the market. Alliance & Leicester, for example, launched its new 100 per cent plus loan-to-value (LTV) mortgage called ‘PlusMortgage’, which combines a mortgage with an unsecured personal loan up to a maximum 125 per cent LTV.
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Meanwhile Bristol & West has launched a range of mortgages available to professional first-time buyers with LTVs up to 100 per cent.
Other lenders that will lend 100 per cent of a property’s value include Scottish Widows, Mortgage 2000, Mortgage Express, Stroud & Swindon Building Society, Standard Life Bank and Portman Building Society. Northern Rock, BM Solutions, Accord Mortgages, Coventry Building Society and Bradford & Bingley all offer loans above 100 per cent LTV.
According to a report by the Mortgage Advice Bureau, the number of first-time buyers taking on mortgages with LTVs of 100 per cent or more doubled between 2005 and 2006 and 11 per cent of all Mortgage Advice Bureau cases now apply for a loan in excess of 100 per cent. Rising property prices and interest rate hikes were said to be the main reasons why people were borrowing more.
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Mortgage Advice Bureau lending manager, Brian Murphy, says: “Many in the market still view these products as the final resort for mortgage borrowing.
However, as seen through the increasing number of buyers opting for these products in 2006, these mortgages are now a very real solution for first-time buyers who stand little hope of entering the housing market without them.”
Recent research carried out by YouGov shows that around half of actual and potential first-timers either have no savings or intend to rely on friends, family or personal loans to get hold of deposits.
An impossible situation?
It is not surprising when you consider that house price inflation has been rising at a quicker rate than people can save for a deposit, leaving first-time buyers in a position where getting a meaningful deposit together is nigh on impossible.
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According to financial education charity Credit Action, a couple wanting to buy their first home will now have to save the equivalent of 81.8 per cent of their joint income to build up the £32,784 needed to buy a typical home, including deposit and Stamp Duty.
Over the years, lenders have come up with a number of solutions to the problems faced by first-time buyers, high LTV mortgages being one of them. Some simply offer 100 per cent mortgages while others offer hybrid loans which combine a mortgage with an unsecured personal loan, with the total amount being lent in excess of the property’s value. The extra amount can be used to cover moving costs, Stamp Duty and to consolidate other debts.
One reason for borrowing extra may be for home improvements; it may be argued that this could raise the value of the property, but using these funds for other things such as holidays – as borrowers might be tempted to do – is not really what mortgages were designed for.
Consequently some brokers have raised concerns about the way 100 per cent plus loans are being sold. Bradford and Bingley hit the headlines last month by offering its 110 per cent deal direct to consumers by placing adverts in national newspapers. Some critics said this sort of loan should only be offered via brokers.
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Vicky Luttig of Bradford & Bingley says the lender’s high LTV mortgages are available through brokers, branches and call centres via fully qualified advisers only. “We would only offer high LTV products on an advised basis,” she says.
However some critics say that unless a customer uses an independent broker they cannot really be sure that the Bradford & Bingley product – or something similar – is the right product for them.
Andrew Montlake of broker Cobalt Capital says borrowers interested in this kind of product are typically the most ‘green’ and have no experience at all of borrowing at this level. He suggests they should have expert advice and be guided through the mortgage maze, rather than simply respond to an advert.
“Due to the riskier, more ‘geared’ nature of 100 per cent mortgages, I’ve always believed it important for people thinking of taking one out to get expert advice,” says Montlake. “There are different products available with different small print so it’s essential to talk through all the options to make sure you are making the right choice.
“It would make sense, and would arguably improve the quality of advice and reduce the risks involved, if all 100 per cent borrowers had to apply through suitably qualified independent brokers.”
Added protection?
Alliance & Leicester’s recently launched PlusMortgage is only sold through brokers, something which gives borrowers added protection according to Melanie Bien of Savills Private Finance. “It’s good news as they can explain the potential pitfalls of the deal and ensure they understand what they are signing up for.”
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The PlusMortgage is essentially a hybrid product which combines a mortgage with an unsecured personal loan. The same rate is applied to the mortgage and personal loan for the term of the agreement. Borrowers have a choice of how much weight is given to each part of the loan – options range from 95 per cent LTV secured plus 30 per cent LTV unsecured to 95 per cent LTV secured plus 5 per cent LTV. The maximum value for the personal loan part of the product is £25,000.
Alliance & Leicester head of specialist mortgages, Jeremy Claridge says: “PlusMortgage is highly competitive when compared against similar products in the market. We will be the only UK mortgage provider to offer options at 100 per cent, 115 per cent and 125 per cent LTV with a facility to make unlimited personal loan overpayments which gives borrowers real flexibility as to how and when to reduce their borrowing.”
Claridge says first-time and next-time buyers with little or no deposit can benefit from the deal, as can people requiring funds for home improvements, fees or stamp duty.
Ray Boulger of broker John Charcol says more competition in the 100 per cent plus market is welcomed by brokers. “Some good aspects of the PlusMortgage criteria include no unreasonable restrictions on how the unsecured loan element can be used, a valuation fee refund on most products and good indicative income multiples of around five times single or joint for most borrowers,” he says.
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Other 100 per cent plus deals available include Northern Rock’s ‘Together’ mortgage, which allows borrowers up to 125 per cent of the property’s value and BM Solutions’ Mortgage Plus which also offers 125 per cent LTV.
Suitable for who?
High LTV loans were introduced by lenders in response to rising demand. More people are taking out such products because they do not have a deposit and believe that if they do try saving, property prices could increase in the meantime, pricing them further out of the market. Anyone who has spent the last couple of years waiting for house prices to reduce so they could afford their first property will have been left disappointed.
“This goes to show that basing your decision to buy or not to buy purely on what house prices might do is not the best way to go,” says James Cotton, mortgage specialist at London & Country. “There is always a greater risk with no deposit, but as long as borrowers think carefully before proceeding and choose their home wisely, this risk can be reduced.
“Forgetting the debate about house prices, 100 per cent loans are definitely suitable for many buyers whose only obstacle to getting on the ladder is the lack of a deposit. Over the past few years, those who have taken the plunge with the help of such deals will be pleased they did so, while others who held off fearing a crash will be kicking themselves.”
One group that 100 per cent plus loans are often aimed at is graduates and professionals. As the proportion of people going to university has grown over the last few years, as has the level of fees they pay, we have seen a new generation of young people starting their working lives much later, often saddled with thousands of pounds worth of debt.
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Faced with the choice of either delaying a house purchase until the debt has been paid off and a new savings pot accumulated, or taking the plunge earlier with the aid of 100 per cent plus home loans, it is unsurprising that greater numbers have more recently chosen the latter. However, in reality only very few borrowers borrow as much as the maximum available.
“Despite the furore surrounding mortgages reaching as much as 125 or 130 per cent of a property’s value, in actual fact, few people qualify for that amount of money and the average plus size LTV is more like 103 per cent,” says Boulger.
Another reason for targeting graduates and professionals – as Standard Life Bank and Scottish Widows both do – is that these borrowers are also likely to see their income rise in the years following graduation so they will be able to remortgage to a better deal when that happens.
Non-conforming debate
Whether 100 per cent mortgages are suitable for clients who fall into the non-conforming sector is open to debate, but there are some products on offer.
GE Money Home Lending offers 100 per cent LTV on its First National range including first-time buyer plus and near-prime. However GE Money director, Duncan Berry, says 100 per cent lending may not be suitable for everyone.
“We continue to see a significant demand for 100 per cent lending in the marketplace,” he says. “This range is popular with many who face an uphill battle to get on the property ladder and also enables current homeowners to release up to 100 per cent of the equity within their property to refinance existing debts, raise capital to support their businesses or to invest in additional property.”
Downsides
Although 100 per cent plus loans can help struggling first-time buyers get on the ladder, there are several risks associated with such products.
The obvious risk is negative equity. With no equity in the property, any drop in value would leave the borrower owing more than it is worth.
House prices have risen continually over the last 11 years, but this does not mean the future will hold the same fortune. So borrowers could be trapped in a negative equity situation for many years to come, preventing them from making the most of the more competitive mortgage deals or from moving up the property ladder
“However, this is only a real issue if the borrower needs to move or refinance,” says Cotton. “Therefore, when borrowing at 100 per cent, borrowers must be happy that they are buying a place that they can comfortably live in for a while if necessary.”
Another downside of high LTV mortgages is that rates are higher than on products with lower LTVs because lenders see such borrowers as more of a risk as they are not committing any funds of their own. According to the Mortgage Advice Bureau, interest rates are typically 1 per cent higher than other packages. On average, a borrower applying for a 100 per cent plus loan could expect to pay a 1.25 per cent premium over Base Rate.
“If you can possibly afford to put down a deposit, perhaps by borrowing from parents, we would always advise clients to do so,” says Bien. “Another problem with a high LTV is that the lender may impose a higher lending charge to protect themselves. However, many lenders no longer impose such a penalty so borrowers should shop around for one that doesn’t.”
Whether the customer can manage the debt is also an issue. Someone unable to accumulate any savings before stepping on the ladder could find long-term high monthly repayments a struggle.
“The Alliance & Leicester deal, for example, is available up to five times single or joint income, which is fairly high, so borrowers need to be sure that they can cope with the monthly payments, as they are likely to be opting for 100 per cent LTV in the first place because money is tight,” warns Bien.
