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Banks have pulled 100% mortgages
since the credit crunch
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100% mortgages - what are the alternatives?
Writes Hazel Cottrell
hazel.cottrell@consumerchoices.co.uk
The death of 100% mortgages has left many people struggling to remortgage and others unable to get on the housing ladder. What options are left?
100% mortgages were booming just 18 months ago. But since the credit crunch began, mortgage lenders have been tightening their lending criteria and increasing their deposit demands. Now, the banking crisis, falling house prices and the onset of recession have caused providers to take them off the market completely.
In this guide we’ll look at the death of the 100% mortgage and consider alternatives for first time buyers without a 10-25% deposit. We will also consider remortgaging options for those with little or no equity in their home.
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What were 100% mortgages?
100% mortgages were popular with first-time buyers, divorcees and those renting in urban areas where it was difficult to build up a deposit. They were a feature of a housing market out of sync with wages and were fuelled by the false expectation that housing prices would not be subject to a major correction.
People wanted to find a way onto the property ladder, even if it meant accepting higher costs for borrowing. 100% mortgages came with higher interest rates – generally about 1% more than a 75% mortgage - and the borrower often also had to pay for a mortgage indemnity guarantee (MIG), a form of insurance which benefited the lender if the house purchaser defaulted on the mortgage.
Some mortgage providers even offered mortgages up to 125% of the value of a property. This meant the house buyer had cash to pay for the extra costs involved with purchasing a house such as solicitor and valuation fees. It also allowed them to furnish their home without ever having built up savings.
In 2006, around 22,000 mortgages (2% of all home loans that year) were taken out at 100% or more of the property’s value, according to the Council of Mortgage Lenders.
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Why have they all disappeared?
Lenders who provided 100% mortgages relied on being able to borrow money cost-effectively from other financial institutions. Both these institutions and borrowers who took out 100% mortgages relied on property prices continuing to rise.
Since October 2007 house prices have not risen. Rather they have fallen 14.6% in 12 months. The average house price in October 2008 stood at £158,872, which is £27,000 less than in October 2007.
This has left many homeowners in negative equity, ie with mortgage debt that exceeds the value of their house. It is negative equity, combined with banks becoming more wary of lending to each other, that led to the retraction of 100% mortgages.
As Ray Boulger, senior technical manager at independent mortgage adviser Charcol (www.charcol.co.uk) explains: “When property prices are falling, lenders perceive higher loan-to-value (LTV) cases to be more risky, because loan to value is probably the biggest single determinant of risk.
Katie Tucker, technical manager at Mortgage Force (www.mortgageforce.co.uk) adds: “To have a lot of borrowers on your books with 100% mortgages is fine in a healthy economy, but if unemployment levels suddenly start going up, you see your defaults go through the roof.
“There is too much risk to the lender to have borrowers falling into negative equity and at the end of the day lenders really want to avoid putting people in a repossession situation.”
The Bank of England estimates that the fall in house prices has left nearly half a million homeowners in negative equity and plenty of those will be homeowners who took out 100% mortgages.
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What are the alternatives to 100% mortgages for new buyers?
For first time buyers, the more you can save up the better as most lenders now require at least a 10% deposit. The bigger deposit you have, the better deal you are likely to get as you will be seen as “lower risk”.
As Mortgage Force’s Katie Tucker observes: “people aren’t really leaping onto the ladder at the moment.” She says that a large number of people who want to buy are postponing their purchase until next summer and she gives four good reasons to do this:
- Property values are expected to continue falling.
- The longer you can wait, the bigger deposit you can save up, which will give you access to better deals.
- You have until 3 September next year to take advantage of the £175,000 temporary lower limit on stamp duty.
- There is a lot of activity from the government and it’s hoped that their actions will bring lenders’ rates down.
However, she says “I think it’s really important to say that despite these reasons why some people are holding back, if you are currently renting but have got a healthy deposit and can afford the monthly payments, now is not a bad time to buy your first home, providing you plan to stay there for the long-term.”
If you haven’t built up a sufficient deposit, and you can’t wait any longer, there are options you can consider:
- There are still some mortgages available up to a 95% LTV ratio however it’s important to remember that for mortgages over a 90% LTV ration you are likely to be forced to pay higher lending charges. Use our mortgage calculator to work out what your monthly repayments might be.
- It might be worth seeing if you can get help from your family or take out a low-cost personal loan to bolster your deposit as a larger deposit also helps you avoid higher lending charges.
- If you are unable to save up a large deposit, there are other options you can look at such as part-ownership mortgages, buying with a friend and government assisted mortgages. These are explored more fully in our guide to mortgages for first time buyers.
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What are the alternatives for remortgaging a 100% mortgage?
For many people who took out 100% mortgages, their fixed term discounted period is coming to an end and they are being transferred onto their lender’s standard variable rate (SVR). Because no lenders are currently offering 100% remortgages, they are unable to switch onto a cheaper deal so are effectively stuck.
But, as Charcol’s Ray Boulger points out: “It’s not just a question of 100%. Anyone who needs more than 90% is almost certainly not going to be able to find a mortgage that’s worth remortgaging onto because lenders have been progressively reducing the maximum LTV they will offer on decent mortgages.”
Although standard variable rates are generally not the best value, being on one is not the end of the world.
Mortgage Force’s Katie Tucker says: “A lot of people stuck on a 100% mortgage are choosing to go onto their lender’s standard variable rate.There is hope that standard variable rates will fall even further following the recent dramatic base rate cut of 1.5%.”
She points out an alternative option; some people have been taking out personal loans to pay off part of their mortgage, thus creating a deposit from loans.
But she says: “That’s not really our preferred route, because the interest rates are normally higher on personal loans. At the end of the day, once you’ve added up the monthly costs, most of them are better off staying on their lender’s standard variable rate.”
Compare mortgages to see whether you could switch to a cheaper mortgage.
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Will 100% mortgages ever return?
Experts Katie Tucker and Ray Boulger both believe that we could see the return of 100% mortgages one day. Although that day may be rather far away.
Mortgage Force’s Katie Tucker said: “There’s no reason that lenders wouldn’t attempt it when property values are storming upwards again.”
Charcol’s Ray Boulger said: “I think they will almost certainly return. I don’t see them returning this year or next year and maybe not even in 2010, but they will come back and they will come back when two things have happened First of all, when there is a greater availability of mortgage finance and secondly, when property values have started rising again.”
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