Easy Financing For Mortgages Has Gone

Easy financing appears to be over for home buyers. Lenders are taking a much more cautious approach to lending and 100% loans seem to be disappearing.

About a third of 100% mortgages have been culled by lenders since mid-2007 and loan-to-value criteria have been lowered for the best interest rates.

First-time buyers will be hit by the trend and those with high percentage mortgages could be in for a rate shock when they come to the end of their fixed rate deals this year.

The new approach by lenders is vastly different to the way they were bending over themselves to loan out money in recent years.

The cut in loan-to-values (LTV) will mean higher deposits. For example, for a property of £150,000 a 10% deposit (90% LTV) would be £15,000 as opposed to a deposit of £7,500 for a 5% deposit (95% LTV). These are hard numbers for first-time buyers to find.

The tougher borrowing criteria have contributed to the slowdown in the housing market. With falling house prices it also means that the amount of equity people have in their home will decrease. When many come to remortgage they might find that their LTV is too high, and the lender will hit them with a much higher interest rate upon remortgage.

David Knight, mortgage analyst at Moneyfacts, said: “This is an understandable about-turn from the lending strategies we have witnessed over the past five years or so, when lenders pushed LTVs to highs of 130%, with 95% products considered the norm. It is not hard to understand why this pattern has emerged. With mounting evidence that housing prices are cooling, combined with the increasing number of borrowers facing debt problems, it is not welcome news for those consumers with only a small amount of equity.

“This more cautious approach by lenders starting to reduce their exposure to property price fluctuations shows they have a real concern over the future of the UK housing market. A case of negative equity is bad news for both the borrower and the lender. Should this conservative approach continue, borrowers who come to the end of a deal but find themselves still borrowing at a high loan-to-value ratio could find the choice of deals limited, or may be forced to pay a much higher price.”

Alliance & Leicester and Britannia Building Society have both cut maximum loan-to-value on new mortgages from 95% to 90% in recent weeks, and the Yorkshire Building Society doesn’t offer 100% mortgages any more and has introduced more attractive rates for those mortgages below 75%.