The housing market could go into reverse gear within the next 12 months. Taking a 100% mortgage now could leave you owing more money than your house is worth if prices fall.
Following the late 1980s housing boom, high interest rates and rising unemployment led to tens of thousands of homeowners, who had defaulted on repayments, having their home repossessed and the property market crashed. It could be argued that a similar scenario may be replayed soon.
Some find it ominous that growing numbers of lenders are offering no deposit mortgages for the first time since the early 1990s.
Abbey is offering a choice of fixed and tracker mortgages either with or without arrangement fees; for example, the two-year fix at 6.35% carries a fee of £995. The rate is 7.19% for remortgagees (separated partners starting again) on a two-year fix, but there is no arrangement fee. An affordability calculation determines how much you can borrow (up to five times your income) and there is no higher lending charge (HLC). This is a plus as Moneyfacts research shows that 75% of lenders levy a HLC which typically kicks in when you exceed the 90% loan to value (LTV) mortgage threshold.
The purpose of the HLC is to cover the cost of the lender's insurance against the risks of you defaulting and the lender having to repossess and sell on your home. You might think it a bit rich that you foot the bill when it offers you no benefit or protection. In fact, rather than scraping together the 3% deposit for a maximum 97% mortgage from the Halifax, say, with the add-on arrangement fee and HLC, better value could be achieved by borrowing 100% from a lender who does not inflict the HLC.
The HLC is applied, at varying percentages, on the difference between a 75% LTV and the loan actually taken. For example, 12% is charged by Royal Bank of Scotland on the difference between 75 and 100% LTV. This amounts to 3% of the entire loan; a first-timer borrowing 100% on a property valued at £100,000 (25 year repayment mortgage at 5%) would forfeit £3,000. If added to the loan, rather than paid upfront, this figure will exceed £5,000 over the 25 year term.
Why limit yourself to a 100% LTV mortgage, anyway? Several lenders offer in excess of this amount, as much as 125% (Birmingham Midshires, Northern Rock) and 130% (Mortgage Express). Apart from dispensing with the need for a deposit, the extra funds can be used to defray the costs of stamp duty, legal fees, new furnishings etc.
However, the price, of course, is a higher interest rate and a greater potential for long term negative equity. How certain are you that employment or lifestyle changes will not dictate the need to sell before then? And if there's a recession in the housing market, you will have a serious problem.
