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The high cost of a low deposit – 90% mortgages

October 28, 2010

Prior to the credit crunch which hit the UK with its full brutal force during 2008/09 – 90% mortgages were priced very competitively by UK mortgage lenders, and this product segment often featured some market leading deals. First time buyers that had a 10% deposit available were readily able to access highly competitive mortgage deals in terms of interest rate, features and fees. There were literally hundreds of product options available at 90% loan to value – and as in any market, competition always benefits the consumer.

In fact, before 2008 it was possible to obtain 95%, 100% or even 100%+ mortgages. 90% mortgages were priced below than these higher loan to value mortgage deals, in part to tempt borrowers to put down a 10% deposit and therefore have a margin of equity on moving into the property. Equity is the term used to describe the margin of difference between the amount owed on a property and the value of the property. The higher the margin of equity the better for borrower and lender, as it reduces risk for both.

But how things have changed since the credit crunch. The mortgage lending market no longer considers 10% to be a significant margin of equity – especially with the turbulence in house prices and fears that prices could fall as we move forward into 2011.

It is no longer possible to obtain 100% or even 95% mortgages in nearly all cases. In fact, it is anticipated that 100% mortgages will remain a thing of the past – permanently – and possibly even become illegal to offer.

90% Mortgages are no longer competitively priced and in fact in the current market they are priced at quite some margin above lower loan to value mortgage deals where a borrower is required to put down a much larger deposit. Not only have the price of 90% mortgages become much higher (relatively speaking) than in the past, but also the lending criteria that borrowers must pass in order to obtain a 90% mortgage has tightened to a significant degree. In fact, it has been reported that more than 50% of all mortgages taken out in the 3 years prior to the credit crunch would not be approved under current market conditions. This is a scary thought for those borrowers that bought a home in the few years prior to the credit crunch, and once interest rates increase there could be a real sting in the credit crunches tail.

So what should prospective first time buyers who only have a 10% deposit available do? Well for a start, you should seriously consider whether it is the right time to step onto the property ladder – and only move forward if your situation is very stable and your household costs will be comfortably affordable. The housing market and economy as a whole are expected to go through a tough period through 2011 and into 2012. In fact some experts think that the credit crunch will continue to affect the mortgage and housing market through and beyond 2014.

Despite all the negatives, the current adverse market conditions mean that there are property bargains to be had – with properties being sold for much less than they were valued in 2007 in some areas of the UK. So it is not all doom and gloom. It is just a time where you need to ensure you make smart, knowledgeable and well supported decisions about your future.

So who can help you make smart, well supported decisions? It is possible to approach mortgage lenders directly if you are interested in finding out more about a specific 90% mortgage product you have seen advertised. But in the current market never has it been more important to obtain quality mortgage advice from an independent source, to help you make wise decisions. So prudence says that the intelligent choice is to employ the services of a whole of market independent mortgage adviser.

28th October 2010

Written by Richard Best

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