Intermediaries consider the new 100 per cent loan-to-value mortgage, launched by Aldermore to be a blueprint for lenders looking to attract borrowers with no deposit.
The Aldermore family guarantee mortgage asks parents, step-parents or grandparents of prospective borrowers to provide a guarantee secured against their property for the part of the loan that exceeds 75 per cent LTV.
Mortgages where a borrower does not have to put down a deposit have all but disappeared since the financial crisis. The number of 100 per cent mortgages on the market has fallen from a peak of 238 in August 2009 to just 14 today, available only in Northern Ireland or on a guarantor basis.
Tipton & Coseley Building Society only lends locally and Northern Bank, which offers 100 per cent LTV mortgages without the need for a guarantor, lends exclusively to borrowers in Northern Ireland. Marsden Building Society offers a variable deal, which also requires a guarantor.
Having a family member provide a guarantee offers added security for the lender in the event of default and brokers believe this will become a more common feature of higher LTV lending in future.
John Charcol senior technical manager Ray Boulger says: “It is unlikely we are going to see many lenders come up with higher LTV mortgages without additional security from a guarantee or a second charge on a family member’s property.
“This is likely to remain a niche product but it is always good to see other options available that are structured sensibly.”
Chadney Bulgin mortgage partner Jonathan Clark says: “The only other comparable products are ones where lenders want deposited money from relatives.
“The only way we will see 100 per cent LTV, or even 95 per cent LTV, is if people come up with these sorts of schemes.”
House prices are down by almost 10 per cent since their peak in the third quarter of 2007 and many predict they will fall further, leaving borrowers with higher-LTV deals at serious risk of falling into negative equity.
London & Country head of communications David Hollingworth says: “Borrowers should not take out this type of product thinking it is a short-term investment.
“If a borrower has a mortgage that is 100 per cent LTV and house prices fall, there is a risk they will slip into negative equity. That only becomes less of an issue if they do not want to move in the short to medium term.”
At 6.48 per cent fixed for three years, the Aldermore product is not cheap. Boulger says: “Anybody looking to take up this deal should seriously consider whether they can find an extra 5 or 10 per cent deposit, because the marginal cost of borrowing an extra 5 per cent once you go above 75 per cent LTV is high.”
Burwood Financial Consultants managing director Peter Suttill feels it is sensible to price the product in this way. He says: “There should be an incentive for people to save that 5 per cent or 10 per cent deposit, so it seems appropriate that there is a higher rate for 100 per cent loans.”
Coreco director Andrew Montlake welcomes products that aim to help borrowers break into the property market but he is wary about the idea of 100 per cent mortgages. He says: “I think it is good if people put at least 5 per cent of their own funds invested in a property rather than nothing at all.”
Aldermore’s criterion states that the maximum age of a guarantor is 70 at the end of the guarantee period, which is 10 years. This means if grandparents want to be a guarantor they must be 60 or under when the mortgage is taken out.
Boulger says this is a shame as grandparents can more suited to the role of guarantor. He says: “There will be many more instances where grandparents have equity in their properties than parents but, bearing in mind that the minimum age for first-time buyers for this product is 25, there will be few people older than this who will have grandparents who are 60 or younger.”
However, All Types of Mortgages managing director Dale Jannels says: “This product at least provides an option to clients who otherwise would not be able to secure a mortgage.”