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The High Margins On High Loan To Value Mortgages

December 9, 2010

Prospective First Time Buyers, who have suffered since the credit crunch to find high loan to value mortgages such as 90% mortgages are now being offered an increased availability of such deals up some 175% since this time last year.

However, despite signs of increasing availability of higher loan to value deals in the mortgage market, there are widespread fears and in fact expectations of house price falls in 2011. Therefore, maybe the best advice for first time buyers is to sit tight just now and wait for the house price cuts to bite before making a move.

Mortgage activity has remained depressed with only around 47,000 mortgages approved in November compared to a typical expected total of around 80,000 in a ‘normal’ market. House prices which were reported as increasing at a slow rate back in the summer are now reported as stagnant or decreasing in nearly all post codes areas across the UK. The number of first time buyers registered with estate agents as seeking properties shrank by 2 per cent in October and fell by another 4.3 per cent in November.

Despite falling demand and activity as a whole, UK mortgage lenders claim there is a strong demand for 90 per cent mortgages from first time buyers and also existing home owners seeking remortgages. Unfortunately, borrowers who can only provide 10 per cent deposits are regarded as a bad risk by increasingly nervous regulators, who impose daunting capital adequacy requirements on lenders, pushing up the price of high LTV mortgages.

For example, a major UK building society has recently launched fixed rates of 5.68% for 3 years and 5.78% for 5 years available up to 90% loan to value (LTV). By contrast, at 65% loan to value borrowers could fix at 3.38% with the same building society, or obtain a 4.08% 5 year fixed rate mortgage at 75% LTV (25% deposit or equity).

Ray Boulger of John Charcol said: “The main reason for the much larger differential between the rates offered for low and high LTV mortgages is not, as most people think, the credit crunch but the impact of Basle 2 regulatory rules. These require lenders to hold progressively increasing amounts of capital to support higher risk loans and LTV is considered a major factor is assessing risk. A lender has to hold around six times as much capital to support a 90 per cent LTV mortgage as one at 70 per cent. So the real cost of funding a high LTV mortgage is very expensive.”

Being part of the European Union we are bound by European Legislation with regards to these matters – and therefore the mortgage lenders serving the UK market must meet the capital adequacy rules imposed by “Basle 2″ regulation. While these rules are still in force, and whilst lenders are still licking the wounds imposed by the credit crunch, they will naturally be drawn towards the type of business that is cheaper, easier and less risky to fund. So although there is an expectation that higher loan to value deals will increase in availability with time, the progression is likely to be slow and measured throughout 2011.

Prospective first time buyers may therefore be best advised to hold off for the time being, wait for the expected reduction in house prices and accumulate more savings towards a deposit.

9th December 2010

Written by Richard Best

source : Telegraph Blogs

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