First-time Buyers Lured Into 100% Mortgages

The nightmare of negative equity could be returning to Britain. The problems of negative equity – where a mortgage is higher than the value of a property – was the cause of a great deal of misery for British families in the early 1990s.

So far the genitive equity trap has been avoided thanks to the continued rise of house prices. However, recently there have been strong signs that house prices are beginning to fall month on month, and although annual house price inflation is still positive, industry experts expect it to come to a halt in 2008.

This will cause problems for people who take out 100% mortgages – a mortgage to the full value of the house at purchase time; as soon as the house value dips, they will have negative equity. There have been an estimated 33,000 first-time buyers who have borrowed the full value of their property to the end of August this year, and the Mortgage Advice Bureau says that the number of people taking out 100% mortgages has more than doubled so far this year compared to the same period last year. A small fall in the value of their house would leave them owing more than their home is worth.

Earlier this week the Council of Mortgage Lenders (CML) forecast that the number of homes being repossessed would increase by 50% in 2008, taking the number to 45,000 – the highest in a year since 1994.

Lenders continue to provide 100% mortgages with alacrity, despite the government’s calls for more responsible lending. In April there were only 92 100% mortgage products, but by the beginning of October the number had risen to 160. Although many products have been withdrawn that were available to higher risk customers, first-time buyers with stable jobs are still being offered these risky mortgages. There is a feeling that credit is still being offered at dangerously high levels to would-be borrowers, especially in the current climate of rising interest rates, credit crunch and falling house prices.

Capital Economics expects the value of house prices to fall by 3% in both of the next two years