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Raising the roof on martgages

Mortgage loan to values are on the way up, with some lenders offering advances of 100 per cent or more of the property value. Some companies are targeting specific markets, such as first-time buyers, while others are offering them across the whole spectrum.

Pink Home Loans is currently offering an exclusive fixed rate in conjunction with Mortgage Express. It features a maximum loan to value of 105 per cent, with 102 per cent for first-time buyers. Royal Bank of Scotland offers discounted and fixed-rate mortgages up to 100 per cent and these are available to first-time buyers, remortgagors and existing customers who are moving house.

Tim Sturley, head of business development at Mortgage Express, says that the vast majority of borrowers opting for the 100 per cent mortgage are first-time buyers.

When asked about the type of borrower that will find 100 per cent plus mortgages an attractive option, Julie Pullinger, an independent mortgage adviser at Mortgage Shop Shoreham says: "It is mostly first-time buyers, but some people want to use them for debt consolidation or home improvements."

With the annual rate of house price inflation currently standing at 15.5 per cent at the end of December 2001, according to the Halifax house price index, first-time buyers are increasingly finding that they have no deposit. As David Copland, sales and marketing director at Pink Home Loans says, this could push income multiples to the limit.

Jeff Kirk, corporate relationship manager at Leeds & Holbeck building society says: "People buying their first house often have difficulty with upfront costs." Leeds & Holbeck's fixed rate 100 per cent mortgages are among the few in the marketplace not to feature arrangement fees. As Kirk says, the society recognises that costs are a problem, and tries to keep them as low as possible. Interestingly enough, according to Moneyfacts there is only one fixed rate 100 per cent mortgage, the 5.99 per cent from Leeds & Holbeck, that includes compulsory insurance.

However, Andrew Brind, proprietor of Meridian Financial Planning, feels that the onus should be on borrowers to ensure they have a deposit, as then they usually have access to better rates on mortgages. He says: "Often those clients looking for mortgages of 100 per cent or more have other financial commitments. I try to persuade them to save for a deposit."

It is encouraging to see signs that first-time buyers, who are most often younger borrowers, recognise the risks attached to owning a property. The Council of Mortgage Lenders (CML) says that it is the younger borrowers who are more likely than older households to have mortgage payment protection insurance (MPPI). Looking at borrowers aged between 25 and 34, the CML found that 40 per cent had MPPI, compared to 28 per cent of those aged between 45 and 54.


Lenders recognise that, by lending a higher percentage of the value of the property, they are taking on a higher risk. They can take a number of measures in order to mitigate this, and also to ensure that borrowers do not over commit. Leeds & Holbeck's 5.99 per cent fixed 100 per cent mortgage includes an income multiple of three times principal income, whereas their standard product range will stretch to 3.25 times the first salary. Kirk says that they want to ensure that borrowers consider the affordability of the mortgage.

Some lenders obviously feel that the 100 per cent plus mortgage market is not so attractive, and NatWest and Alliance & Leicester have even gone as far as having differing maximum loan to value percentages for different areas of the country.

Phil Jenks, head of mortgages at Halifax describes why it chooses to provide loans up to only 97 per cent of valuation: "At 97 per cent, we could offer a better priced mortgage than at 100 per cent. The risk curve rises sharply between 95 and 100 per cent and business that we have done at 97 per cent has behaved better than mortgages we arranged at 100 per cent a few years ago."

He also adds that the Halifax may consider the market again in the future, but that at present it is not being pushed by customers to increase the maximum loan to value. It is worth noting that Birmingham Midshires and Bank of Scotland, who are both part of the same group, do offer 100 per cent mortgages.

Others take a different view. Simon Davey, mortgage adviser at Henderson Ponsford & Co, believes that as more lenders enter the 100 per cent marketplace, their product ranges for this sector are beginning to resemble those for the more conventional levels of borrowing. Conversely, John Angela, proprietor of John Angela Associates says that interest rates for 100 per cent mortgages do tend to be higher, adding "there's no such thing as a free lunch".

As an alternative to the 100 per cent mortgage, Angela believes some building firms are offering cash incentives to encourage people to purchase newly built properties.

Lenders do have measures in place to help borrowers who experience financial difficulties, regardless of their level of borrowing. Mortgage Express, for example, allocates a collections officer to anyone who falls into arrears, to get their payments back on track.

All areas of the mortgage marketplace are experiencing fierce competition. But will we ever return to the days of the Northern Rock mortgage that lent up to 125 per cent of the valuation of a property?

Product Review

Skipton Building Society is offering a second issue of the stateside mortgage, which tracks the three-month US dollar London Inter Bank Offered Rate Libor).

The US dollar Libor is the rate at which UK banks lend US dollars to other UK banks and is set by the British Bankers Association. Skipton chose this, rather than the Bank of England base rate because the US Libor is lower. It currently stands at 1.99 per cent, compared to the Bank of England base rate of 4 per cent.

The mortgage is available for loans of up to 95 per cent of valuation and remains at 1.55 per cent above the US Libor for five years. This gives a current payable rate of 3.54 per cent.

Borrowers who redeem the mortgage during the tracker period pay an early redemption penalty of 5 per cent of the mortgage balance. But capital repayments of up to 10 per cent a year are allowed without penalty and there is no compulsory insurance.

In July 2001, Skipton pioneered this type of tracker mortgage with its Manhattan mortgage, which was withdrawn after two months because it was so popular.

The first tranche of the stateside mortgage was also withdrawn within a month because the level of enquiries Skipton received looked set to exceed the £10m it had secured for the product.

Tracking the Libor rate is an innovative concept, but this mortgage is likely to appeal mainly to sophisticated borrowers.

Some borrowers may feel nervous about having their mortgage rate being influenced by the US, especially if the terrorist attacks are still on their minds.

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