Mortgages with a 10% deposit, sometimes referred to as 90% Loan to Value products, are few and far between.
Some of our biggest mortgage lenders, the likes of the Abbey, Alliance & Leicester and the Nationwide Building Society have shunned this 'high risk' lending for new borrowers. Why so?
There are a number of different reasons.
First and foremost, lenders have taken an over cautious approach towards house prices this year. As we have seen, house prices would appear to have stabilised over the summer. However, mortgage lenders need to look further ahead than the BBQ summer that never was! Their collective worry is that as unemployment reaches 3 million (reach for the Prozac), more repossessions will take place which will act as a drag on property prices.
They worry that today's 90% borrower is next months redundancy statistic. No income, no mortgage payments made, no house.
Faced with the prospect of a repossessed property, the bank would try their best to sell the property to cover the remaining mortgage on the property. What if the bank were to make a loss? Not a great place for a mortgage lender to be in the current environment?
Thinking more about the relationship between supply and demand for housing and house prices; recent research has indicated that up to 20% of households have insufficient equity to allow them to move home. With fewer properties coming onto the market (less supply), prices may not actually fall (even if the level of repossessions increase). This assumes that the current levels of demand seen over this year are maintained over the coming years.
Secondly, the Financial Services Authority insist that a mortgage lender sets aside a much larger sum of money in case the mortgage goes bad against a 90% mortgage than say an 85% or 75% loan to value mortgage. This set aside money can not be lent out, so it's earning the lender virtually nothing! In other words, it is very expensive for a mortgage lender to offer a mortgage to someone who is only able to put down 10% (how times have changed!)
For these reasons, the 90% mortgage has become a a byword for high fees, high interest rates and unfavourable terms and conditions. Many lenders have relied upon cross sales of "expensive add on's" such as linked current accounts with monthly fees and the lenders own life and critical illness cover to make the required amount of profit on a 90% mortgage.
The catch? There isn't one, except this mortgage is not available to all and sundry! The mortgage is available to "members" of 3 years standing or longer. In essence, this means that you will need to have had a savings account with the Coventry for 3 years. To widen this criteria further, the lender will also allow an application if your parents have had a mortgage or savings account for at least three years.
It's good to see a local Building Society using their resources to the benefit of their members and the local West Midlands housing market.
If you would like to find out more about this new mortgage, or any other 90% mortgage, give us a call on 0121 733 8833 and we will be more than happy to help.
UPDATE 16th November 2009
The Coventry Building Society have today confirmed that they are widening the criteria so "eligible members" now include grandparents of first time buyers who have been members of the society for at least 3 years.
