I s a new mortgage offering loans of up to 125 per cent a risky deal for first-time buyers?
The Mortgage Plus product from HBOS subsidiary BM Solutions will compete directly with Northern Rock’s Together product which has dominated this section of the market since 1999.
BM’s deal allows clients to borrow 125 per cent of property value, with 95 per cent as a secured mortgage and 30 per cent as an unsecured loan. It is on a repayment-only basis and is designed primarily for FTBs with future earnings’ potential.
John Charcol senior technical director Ray Boulger says: “Any suggestion that HBOS is being irresponsible does not stack up. It is just going to add some price competition. With two players in the market, it will give people more choice.”
Savills Private Finance head of media relations Melanie Bien believes 125 per cent mortgages give an option for people struggling to get on the property ladder.
Chase de Vere Mortgage Management director Nick Gardner says: “Borrowing more than 100 per cent is potentially problematic because you are immediately plunging yourself into negative equity. If you can take a medium-term view, that is fine as it will give you time to ride out any problems. It is an innovative product but if house prices go flat you would be stuck. A lot of people can do very well but it is not a commitment to be taken lightly.”
BM Solutions does not sell its products direct so borrowers will need to take IFA advice on Mortgage Plus. which sets the product apart from Northern Rock’s Together product which is available direct.
Hamptons International Mortgages IFA Jonathan Cornell says it is vital that consumers understand the responsibility that comes with a 125 per cent mortgage and the consequences if interest rates continue to rise or house prices fall.
With so little competition, BM Solution’s offering should be well placed to win business but Boulger suggests Mortgage Plus is not as competitive as it could be.
He says: “The rate is more expensive and the criteria is not as easy to achieve. It is hard to see where this product offers anything more that Northern Rock does not. In price terms, it is not as competitive. I think Northern Rock is unlikely to lose much sleep over this.”
Northern Rock assistant director Ron Stout says there is enough business to go around and more competition is advantageous.
The underwriting criteria for the new product do seem to be quite tough. BM Solutions says that on the day it was launched, half of the 39 applicants were turned down and this is likely to be the trend.
BM Solutions press officer Clare Mortimer says: “Tightly underwritten products, demanding credit criteria and the requirement for a 5 per cent deposit mean the offering will only suit specific borrower needs. It is a really niche product so it always has to be judged on a case-by-case basis. It is not just a line we are saying to make us look good. We do not want bad credit so it is likely that one in two applications will be turned down.”
Boulger says: “BM is being too careful to be seen as responsible and what they are saying does not make sense. If someone has a 5 per cent deposit, they clearly do not need this type of product.”
But Bien says: “They do not want to lend money to people who cannot repay it. You could argue they are thinking about the risk factor. People should be aware of the risks and HBOS are wanting people to put some money in to prove they are serious.”
Coventry Building Society and Bradford & Bingley have offered a similar product for some time and industry figures say other lenders are gauging what has proved to be a lucrative market.
Cornell says: “Other lenders will keep an eye to see how successful the Mortgage Plus product is. It would be great if other lenders go into the market as the more competition there is, the better the rates that borrowers can get.”
Boulger says: “Other lenders are looking at this market. With the IT involved, it will no doubt take a bit longer but there is a good chance that we will see at least one more lender come into this market next year.”
Bien says the risk factor has been a disincentive for lenders to move into the market seven years ago but with house prices having gone through the roof and people finding it increasingly difficult to get into the market with conventional mortgages, demand for a 125 per cent loan is now greater.
BM Solutions may be only the second lender to offer such a product but it is unlikely to be the last.