Lenders pull deposit-free mortgages
Five top mortgage lenders are to stop selling deposit-free mortgages as concern about the housing market deepens.
Deposit-free mortgages allow buyers to borrow up to 125% of the value of their home, and have been very popular over the past few years among first-time buyers hoping house price inflation will enable them to pay off their loans.
However, Alliance & Leicester, Northern Rock, Coventry Building Society and BM Solutions (part of the Halifax group) have all announced they will pull their 125% products by the end of this week. And Abbey says it will also stop offering its 125% mortgage, which it has been piloting since last September.
These types of mortgages, commonly known as 100%-plus products, combine a traditional mortgage with an unsecured loan to allow buyers to borrow additional funds to cover costs such as stamp duty, moving and furniture.
But they are controversial because they effectively leave buyers in negative equity from day one.
The concern now is that borrowers whose 100%-plus products are coming to the end of their discount period could find themselves unable to remortgage onto another deal.
If 100%-plus borrowers are unable to remortgage then they will have to move onto standard variable rates and see their monthly repayments increase. There is a risk that many may be forced to sell their property, potentially at a loss, or face repossession.
For those who have reduced their mortgage down from 125%, Scottish Widows is still offering a 110% product for professionals while Bradford & Bingley has a 110% mortgage through its Mortgage Express brand.
Bradford & Bingley says it it reviewing whether to continue offering these high loan-to-value products. Scottish Widows says it has no plans to reveiw its product.
A spokeswoman for Alliance & Leicester says the slowdown in the housing market is the main reason why it has decided to scrap its 125% product. With house prices predicted to, at best, remain static or, at worst, fall in 2008, the fear is people with 100%-plus products will not see their property increase in value this year.
Both Coventry and Abbey say a lack of consumer demand is the key reason why they have decided to ditch their 125% offerings.
A spokeswoman for Abbey said: “At this time people should save for a deposit before they buy.”
It is not known how many people have 100%-plus products in the UK and how many of them are currently coming to the end of their discount periods. Coventry says 100%-plus loans make up around 8% of its total mortgage book, equating to around 8,000 mortgages.
Ray Boulger, from mortgage brokerage John Charcol, said first-time buyers have been shying away from 100%-plus products for some time because of fears that house prices will either fall or remain flat in 2008.
Watch a recent episode of Moneywise TV and hear from first-time buyers who borrowed more than the value of their property and are concerned about negative equity.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Unsecured loans mean the loan is not secured on any asset you already own, such as a house, car or other assets and so is a riskier prospect for the lender. Therefore, they usually come with higher interest rates than their secured counterparts, are less flexible and levy high redemption penalties. Most “personal” loans are unsecured.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.