100 per cent and beyond

With the price of the average property sitting at an unaffordable £198,500 (Halifax House Price Index, September 2007), it is understandable that first-time buyers have to pull out all the stops when reaching for the first rung of the property ladder. But if the preferable solutions, such as being given a substantial deposit by your parents or landing a very well-paid job early on in your career, do not come off, borrowing 100 per cent of the property value – and sometimes even more – can present the only answer.

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A different landscape

When house prices were rising at a rate of knots, it was acceptable to have no equity in your property. After all, even now annual house price inflation is still pegged at 10.7 per cent, says Halifax, meaning your property is on track to be worth 10 per cent more than you paid for it in a year’s time. But today, unfortunately, it’s not quite that simple.

The average price of property month-on-month is actually falling – by 0.6 per cent in September, says Halifax, while Rightmove puts the decline at a more substantial 2.6 per cent in the same month. This means annual inflation rates are slowing (Halifax reported a rate of 11.4 per cent for August compared to September’s 10.7 per cent).

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What’s more, a spate of property repossessions in the USA, which contributed to the Northern Rock debacle this side of the Pond in August, has prompted a global credit crunch, under which high loan to Value (LTV) mortgages are now particularly contentious. In short, this puts 100 per cent lending and beyond in a different light.

Can I still get a 100 per cent mortgage?

So surely, under the circumstances, lenders are reining in these types of deals? Not according to new research from online mortgage search engine mform.co.uk. The website says that the choice of 100 per cent loans has actually increased by 70 per cent in the past six months – and that borrowers can now choose from 160 mortgage products compared to 92 in April. The number of lenders offering 100 per cent loans direct, however, has remained steady at 22, says mform. “The rise in the number of 100 per cent mortgage products available demonstrates that lenders believe there is a genuine demand,” says marketing and business development director, Francis Ghiloni.

But according to Ray Boulger, senior technical manager at broker John Charcol, this type of research can appear misleading. “It’s important to recognise that this research relates to the increase in products available, not lenders offering 100 per cent loans,” he says. “And a ‘product’ simply means a small variation on what is essentially the same deal – for example a fee-free version with a slightly higher interest rate.”

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In actual fact, lenders are pulling on the reins of high-LTV products in a number of ways. Northern Rock has tightened its lending criteria on its Together mortgage range, which offers 100 per cent LTV plus an additional 25 per cent unsecured loan, payable at the same rate as the mortgage. “Whereas Northern Rock used to allow up to 5.9 times income on this product, it is now advertising 4.9 times income,” says Boulger.

The type of loan is probably also now harder to qualify for. “Northern Rock assesses your application using your income level, whether or not you opt for a fixed rate and your credit score,” says Boulger. “But, though lending works on a case-by-case basis, it is likely that the credit score part is now more significant.”

Some lenders have recently abandoned their 100 per cent mortgage offerings altogether. Accord no longer offers its 115 and 100 per cent loans, while Norwich & Peterborough pulled 100 and even 95 per cent lending last month.

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Abbey, however, went against the grain in September, by actually launching a 100 per cent plus mortgage – a move that financial analysts like Moneyfacts, described as ‘surprising’. The mortgage allows borrowers to take 100 per cent of the property’s value plus up to 25 per cent in the form of a secured loan on the condition that this does not exceed £25,000. In other words, it’s a 125 per cent mortgage or more for properties of £100,000 or less, though, as property for this price is usually now unobtainable, in most cases the loan will actually amount to below 125 per cent LTV. What’s more, Abbey is only sticking a toe into the newly-treacherous high lending water. The deal is only in its pilot stages and available through just a handful of brokers.

Should I go for a 100 per cent deal?

Neither a cooling housing market nor a stricter lending environment changes the desire for first-timers to own their own property. The affordability stakes have not changed either – so what’s to be done? “One hundred per cent mortgages are still vital for those who could not otherwise get on the property ladder – borrowers just need to be aware of the risks involved,” says Melanie Bien, director at independent mortgage broker Savills Private Finance. “If property prices fall first-timers will find themselves with negative equity – where your mortgage is bigger than the value of your home – and this could mean they are unable to move for several years until the position is reversed. But as long as borrowers bear this risk in mind and view property as a long-term proposition, rather than something you buy and sell on again quickly, this shouldn’t be a problem.”

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Are 100 per cent loans more expensive?

In the lending world borrowers don’t get something for nothing – so if you want to borrow the entire value of the property or more with no deposit in return as security – you will pay for it. “The big downside of 100 per cent mortgages is that you pay a premium on the rate – usually at least 1 per cent more,” says Bien. “For example, the cheapest two-year fix for those with a 5 per cent deposit is Giraffe Money’s 5.48 per cent with £999 fee. But if you don’t have a deposit, you would have to pay 6.54 per cent with Bank of Ireland and a £499 fee.”

Borrowers should also watch out for higher lending charges (HLCs). This is a hefty fee that pays for the lender’s insurance should you default on your loan – an event deemed more likely when borrowing large LTVs.

However, most 100 per cent lenders do not impose HLCs, according to Boulger. “In fact, some lenders that have come into the market, like Leeds and Coventry building societies, still impose HLCs on products of 95 per cent and over but not on specific 100 per cent products, which is an odd situation.” Royal Bank of Scotland and Bank of Scotland are two lenders that do impose HLCs on 100 per cent loans. For more details on lenders’ general offerings, see box.

What’s the upshot then?

With today’s lending environment, it’s especially important that borrowers understand the risks involved in taking on a mortgage for the full property value and beyond. That said, the deals still present a workable solution to the constant problem of affordability. “With property prices rising so much faster than salaries, a 100 per cent mortgage is still the only way some people have a hope of getting on the housing ladder at all,” says Bien.

And even if you can scrape together a 5 per cent deposit, if it leaves you on the brink of affordability, a 100 per cent deal could still present a better option, says Boulger. “While taking a 100 per cent loan should not be encouraged, scraping a 5 per cent deposit together and leaving yourself with no savings or room to manoeuvre financially can mean running a greater risk of not being able to service your mortgage repayments.”