100% Mortgages are back and here to stay?

There were several headlines last week announcing Aldermore bank’s new 100% mortgage launched last week aimed at first time buyers.

Aldermore are one of the newer banks – only opening in 2009, and we have found them pretty refreshing to deal with.  They are however taking no big chances on this product, with a 3 year fixed rate of 6.48%. The Family Guarantee Mortgage however allows homebuyers to buy a property without a cash deposit, as long as a parent or relative guarantees any borrowing above 75 per cent loan-to-value, with a charge on their own property. Borrowers must be at least 25 years old, and seeking a mortgage of no more than £250,000.

From no 100% mortgages, or even 95% mortgages, available for the first 2 years after the credit crunch started, lenders are beginning to understand the market and get more confident again in offering new products.

There are now 4 lenders offering 100% mortgages – with arguably the most competitive being Marsden Building Society’s Family Offset Deposit Assist mortgage whereby the borrower’s relative must keep savings equal to at least 20 per cent of the property’s value in the society’s offset savings account. Its mortgage rate is attractive, at 3.99 per cent with a fee of £498.

As with buy to let generally it is better to invest with a deposit to get the best rates.

100% mortgages got a bad reputation at the height of the credit crunch as people clearly are now in negative equity that took these out at the peak of the market – although that for me was not the biggest problem with the lenders at this time – i.e. whether it was your deposit down, or the banks borrowed money, you will still have lost money if you bought in 2007 in many parts of the UK.

The biggest concern was the level of borrowing compared to earnings that banks lent, plus the questionable self-certified mortgages, and the relaxed looking at rental coverage on many properties.

For example, lending someone earning £100,000 per annum, a 100% mortgage on a property valued at £200,000 at 5-6% interest (ie slight premium rate due to no deposit), would on paper seem far less risky to the lender than lending someone earning £25,000 a 90% mortgage on a property valued at £175,000.(which pre credit crunch would have happened)

So the lenders have generally learnt to concentrate on affordability ie limit the amount lent based more strictly on the applicants earnings, and look more tightly at the rental coverage.

When looking at buy to let this is crucial – while the lenders look for 125% rental coverage – I personally look for a minimum of 175% as an average when am buying buy to let (will buy a few at less than this but must be a good reason).

As always cashflow and rental coverage are crucial to your buy to let business.

So in summary, while the LTV will always be the headline figure – the key area for lenders and borrowers alike, in my opinion, should be affordability ie salary versus loan, and the rental coverage when looking at buy to let.

For more information on buying buy to let have a look at the Property Secrets website.

Disclaimer

Please note that information in this article does not constitute regulated financial advice, which recommends a course of action based upon the specifics of your personal circumstances.

www.propertysecrets.net is not providing financial, legal or tax advice under the regulations of the Financial Services Authority, and any statements referring to these subjects are to be considered opinion only. The information presented is intended to provide a general overview for personal financial information. It is recommended that before making any decisions based on the information provided, you should take independent financial, legal or tax advice from duly regulated advisors.

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