Is it becoming more difficult to get 100% mortgages?

For first time buyers 100% mortgages have provided a valuable means to getting on to the property ladder for many years. First time buyers so not have an existing property, and therefore do not have the luxury of equity to use towards a deposit and to cover the costs of purchasing a home. With the value of homes at sky high levels most first time buyers struggle to raise even 5% of the property value in order to put down a deposit, particularly given the other upfront costs that have to be paid for, such as valuation fees and solicitor fees.

With a 100% mortgage first time buyers have been able to push aide worries of having to raise a deposit, which for the average property would run into thousands of pounds. Instead first time buyers have been able to save up the other costs such as valuation fees and solicitor fees, and use any remaining money to buy furniture for their home, using a 100% LTV mortgage to buy their property. Of course there are risks to take into consideration with a 100% mortgage, and this includes the risk of negative equity in the event that house values fall before you have made a significant dent in the mortgage balance, and the risk of being able to keep up with repayments on such a large loan.

Most of us know at least a little about the credit crunch that has been sweeping across the nation over the past few months, and this has affected many areas of the financial sector. Lenders are now exercising extreme caution when it comes to riskier loans, and with many lenders considering 100% mortgages to be increasingly risky the availability of these mortgages has dwindled. In fact, according to a recent report around one third of thirty two lenders that offered 100% mortgages in the past had recently decided that they would no longer be offering these 100 LTV loans.

The reduction in the number of 100% mortgages available could make a big difference to many first time buyers, who simply cannot afford to raise a deposit to the tune of thousands of pounds. Although there are still 100% mortgages available lenders will most likely be very careful with regards to who is deemed eligible for these, further decreasing accessibility to these loans.

To make matters worse lenders have also announced that there will be changes to the traditional 5% deposit mortgages. Some lenders have stated that they will now be looking for a minimum 10% deposit on mortgages, making things even more difficult for first time buyers. Others have stated that higher rate will apply to anyone taking a mortgage loan of higher than 90% LTV, which means that first time buyers will be financially penalised simply because of lack of affordability.

One industry official stated: 'This is an understandable about-turn from the lending strategies we have witnessed over the past five years or so, when lenders pushed LTVs to highs of 130%, with 95% products considered the norm.  It is not hard to understand why this pattern has emerged. With mounting evidence that housing prices are cooling, combined with the increasing number of borrowers facing debt problems, it is not welcome news for those consumers with only a small amount of equity.'

Tom Smith
10th March 2008

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