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90% Mortgages – as high as lenders are prepared to go

October 23, 2010

As the term suggests, 90% mortgages, otherwise referred to as 90% loan to value mortgages, are mortgages that cover 90% of the value of a property. So if a property is worth £100,000 a 90% mortgage would be for £90,000.

90% loan to value mortgages can be acquired to either purchase a property where you provide a 10% deposit, or to remortgage a property that you already own.

So why can’t you just get a mortgage to cover the full value of your property? Why do you have to put down a deposit to buy a property?

Well you need to consider the significance of ‘equity’ to both the borrower and the mortgage lender. The 10% margin, the difference between the value of your property and the amount of mortgage you have secured against the property if you take out a 90% mortgage, is known as your ‘equity’. It is the ‘value’ that you have stored up in your property asset. If you were to sell your property – this is the amount of money you would receive following the sale.

In the event that the value of your property falls to less than the total amount of borrowing you have against your property – this is referred to as a ‘negative equity situation’. In other words, you owe more than the value of your property and your property is now a ‘liability’ rather than an ‘asset’.

So why is negative equity a problem? Well, a negative equity situation poses a risk for both the lender and the borrower. The lender always holds a legal charge over your property when they offer you a mortgage. In the event that you default on your mortgage payments, the lender then has the legal right to repossess your property and sell it in order to recover the debt. If the property is worth less than the debt (mortgage) – then they will not be able to recover the full debt and will suffer a loss. It is ‘equity’ in a property which protects lenders against the risk of lending.

The negative consequences for you, the borrower, include being stuck unable to sell your property if you wanted to – unless you could come up with the additional money required to pay off the mortgage in full.

Prior to the credit crunch, 90% mortgages were readily available. As the property market was on an upward curve, the chances of a 90% mortgage falling into negative equity seemed remote. It was more likely that the margin of equity would increase rather than decrease. But since the credit crunch, and the resulting economic down turn – the housing market has at best stagnated, and in many areas of the UK house prices have fallen significantly.

With concerns of further house prices falls going forward, and the more limited funds available to mortgage lenders due to imposed liquidity restrictions, 90% mortgages are as high as mortgage lenders are prepared to go. Gone are the days when it was possible to obtain mortgages at 95%, 100% or even more than 100% of a properties value. Mortgage lenders have significantly tightened the criteria surrounding 90% mortgages – making them far more difficult to obtain. In fact, the number of 90% Mortgages approved reduced by 90% from 245,000 in 2006 to only 28,000 in 2009.

In the future, I am sure 90% Mortgages will return to greater availability – but this may not happen for quite some time. And until it does – the housing market is likely to remain in a spiral of stagnation, with fewer first time buyers feeding into the system.

23rd October 2010

Written by Richard Best

Your home may be repossessed if you do not keep up repayments on your mortgage.

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