The credit crunch and the collapse in house prices have put paid to the 100 per cent mortgage deal. However, of late, there has been a thawing of the mortgage market, and a handful of lenders are opening their books once again to higher loan-to-value (LTV) deals.
Several are offering mortgages at 80 and 85 per cent, and a handful have taken the plunge, offering first-time buyers – and those with little equity – a chance at a 90 per cent LTV mortgage. But although these deals do exist, they come at a price.
The best rates in the market remain those attached to deals with a low LTV, 75 per cent or below. This is because lenders are still being cautious and are trying to control their lending by selecting low-risk candidates. While larger lenders, such as HSBC, First Direct, Barclays, HBOS and Abbey, are loosening their purse strings, smaller building societies are still guarded, largely offering products suited only to those who have big deposits.
Richard Barker, the product manager for mortgages at Norwich and Peterborough Building Society, says: "We are being fairly cautious and controlling the level of lending. As credit is more difficult to come by, we just have to be that little bit more careful about who we lend to and how much we lend."
This is largely due to funding issues. The low base rate and incredibly competitive savings market means that enticing savings customers to hand over their cash is currently no easy feat. Smaller lenders have traditionally been dependent on depositor cash; when it comes to wholesale money markets, they do not have the clout of larger lenders to secure good deals. Consequently, borrowing is more expensive for them and, in turn, for their borrowers.
Despite the continuing preference for low LTVs, the number of deals with higher LTV values has expanded. Before the housing crash started in 2007, most products, especially for first-time buyers, were 90-95 per cent LTV. However, over the past few months, a much wider range of LTV values has emerged. Products are offered at 60, 70, 80 and 85 per cent, with different interest rates, giving borrowers an element of choice.
Different rates are offered depending on the fees you choose to pay and any incentives. Traditional mortgage lending often made a loss on the initial fixed-rate period and the lender would only profit later on in the mortgage term. But, as David Black from financial information service Defaqto says: "Nowadays the savvy lenders are getting a reasonable return throughout the length of the mortgage via either the rates or the upfront fees charged for setting up the home loan in the first place. It's not unusual to see a lender have as many as eight different rates for the same mortgage. You've got to get your calculator out to work out the true cost."
As well as considering the cost of fees, you must take into account the cash value of any incentives offered and weigh them against the slightly elevated rates offered beside them. Some lenders are offering to pay 1 per cent of the purchase price of your property, stamp duty costs or arrangement and valuation fees, but whether it is a good deal depends entirely on the amount you are borrowing and the interest rate charged.
For those in search of LTVs at the high end of the scale there is light at the end of the tunnel. The bigger lenders are offering a range of mortgages at 90 per cent LTV, but they don't come cheap. Halifax has one of the lowest rate 90 per cent LTV fixed-rate mortgages at 5.69 per cent for five years. This is much higher than the lowest rate available for those with some equity in hand. In addition, early repayment charges are a hefty 3 to 5 per cent for the first five years, keeping you tied to that rate. And the sting is in the product fee, at 2.5 per cent. Should you choose not to pay the fee as a percentage, you can opt to pay a potentially lower £495 flat fee, but the rate will go up to 6.14 per cent. Mr Barker says: "The best deals are at 60 per cent LTV and products offering 70 to 80 per cent will have slightly inferior rates. For anything above that the rates will go up. You will pay a premium for going higher, but that's to be expected really."
Higher rates, longer fixed periods and substantial fees seem to be the standard when it comes to 90 per cent LTV. One exception is HSBC's two-year, fixed-rate at 4.99 per cent, the lowest 90 per cent LTV rate on the market. The fee is high at £1,499, but you can opt to up the rate to 5.49 per cent and only pay £199. So what's the catch? You've got to be one of their Plus or Premier current account holders. The Plus account costs £12.95 per month, which, considering you could potentially borrow £400,000, is not huge, plus you get the added benefits of free travel insurance and breakdown cover, among others. The Premier account, on the other hand, is free but it comes with a required minimum annual deposit of £100,000 or a minimum investment of £50,000 with the HSBC group. Not easy for the average first-time buyer to realise.
James Thorpe, a spokesman for HSBC, says: "There are some strings attached. Customers will have to bring their banking to us, but we don't think that's enough of a catch to put them off this very competitive deal."
To be in the running to get a 90 per cent LTV mortgage, you've got to be an extremely low credit risk. This means having a pristine credit record, free of any County Court Judgements, and being in secure employment. You must also be in a good position in terms of your perceived affordability. Lenders have moved away from lending on the basis of income multiples and instead are concentrating on outgoings and incomings. This measure, which takes into account all expenditure – from household bills to food – is deemed more indicative of whether or not you can afford the mortgage. Improving your score does not guarantee you will be granted a mortgage. However, if you are borderline, making cuts, such as switching your utility providers to lower your bills, can ensure you fall within the affordability bracket required. Another way of improving your score is to clear any regular loan or credit-card debt before applying for a mortgage.
Although 90 per cent LTV finance is available, the current climate means that taking it comes with the risk of slipping into negative equity. The movements of the market are unpredictable and so if you are going to opt for a 90 per cent LTV mortgage you need to be thinking long-term.
As Nici Audhlam-Gardiner, the mortgage director at Abbey and Alliance & Leicester, says: "People must be aware in terms of buying a property at the moment that there is likely to be a further fall in prices. While people may think now is a good time to get into the market, they've also got to be prepared to be in there for the longer term rather than the short term. It's really just common sense."