Lenders axe max mortgages
With several mortgage lenders withdrawing 125% mortgage products in recent weeks, what does this mean for first-time buyers? Barney McCarthy finds out
The saying goes that when the going gets tough, the tough get going. Presumably the second part means that they show their mettle and get stuck in rather than disappearing, but many mortgage lenders seem to have taken the latter interpretation when it comes to their larger loan-to-value (LTV) mortgage products. Alliance & Leicester, Coventry Building Society, Godiva Mortgages and Abbey have joined Northern Rock and Birmingham Midshires in pulling their 125% LTV mortgages.
The axing of such products is understandable in the current climate, but it may further reduce the options available to first-time buyers struggling to get a foothold on the property ladder.
How larger loans work
When market conditions are more favourable, lenders tend to be more innovative in terms of assisting borrowers to obtain mortgages. In recent years, relatively low interest rate levels and favourable lending conditions enabled a handful of lenders to launch 125% LTV mortgages as a way of helping first-time buyers. By lending 125% of the property’s value, some of the products not only removed the need for a large deposit, but also covered the costs of moving and the purchase of furniture and appliances, via a personal loan of up to 25% of the property’s value. This came in for criticism at the time, with memories of many homeowners falling into negative equity in the early 1990s still fresh in a lot of minds. However, lenders such as Northern Rock and Mortgage Express pressed on with their ranges.
Now that the credit crunch has hit and continues to bite, lenders are being far more careful about the risk of such large loans. Stephen Leonard, director of mortgages at Alliance & Leicester (A&L), says: “A&L is a prudent and responsible lender, with PlusMortgage [its 125% LTV product range] successfully targeting high quality applicants. However, we keep our product range under constant review and given current market conditions, we will be our withdrawing our PlusMortgage products at this time.”
Although there has been concern that the withdrawal of the products will adversely affect first-time buyers, what Leonard says here is key. The 125% mortgages are by no means a one-size fits all product. The “high quality” customer profile is an important element because lenders need to be satisfied that the borrower can take the extra strain of a higher LTV – especially if it exceeds the value of the property.
Plan of action
With 125% ranges being withdrawn by some lenders, new customers will now be unable to access these products, but what about those already on such deals? Essex-based mortgage broker Danny Lovey has expressed concerns that customers already on the deals may not be treated fairly, in line with the Financial Services Authority’s regulations. He says: “If borrowers live in an area where prices are steady or falling and there is no positive equity in the product, what happens then? How do we know if the current lender will allow them to stay on the product and should they offer them the choice of leaving if they are on an extortionate interest rate?”
Coventry Building Society, which has recently withdrawn its Moregage range from the 125% sector, has already reassured existing borrowers with this type of mortgage that they will have several options to consider when their scheme ends. Colin Franklin, head of sales at Coventry, says: “As a building society we look after our borrowers. We already offer Moregage customers a competitive fee-free fixed-rate product when their scheme ends. In addition, the Coventry’s new business schemes have always been available to all new and existing borrowers and as most Moregage customers borrow substantially less than the maximum, many will be eligible for a traditional new business product.”
Proceed with caution
But despite these words of comfort, it is still worth reconsidering your options if you are currently on such a deal. Katie Tucker, spokesperson for brokerage Charcol, says borrowers should act now to stand themselves in better stead in future. “Anyone with existing mortgages in excess of 100% should overpay as much as possible now to reduce their loan-to-value to less than 100%, otherwise their chances of having a remortgage option when the time comes, are slim.”
If you do have a 125% LTV mortgage, it is important not to panic, but speak to your lender if you are at all worried. You may find that when you come to remortgage you experience a hike in your monthly repayments and your product rate, but if you start making plans now, this will come as less of a surprise.
Tags: 125% mortgages, Credit crunch
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