2011 saw the birth of a new trend in mortgage lending, aimed at cutting costs for borrowers and allowing more first-time buyers access to the property market. Lenders such as Barclays, Northern Rock and the Yorkshire Building Society are lowering the deposits and increasing the loan-to-value rate of several schemes in their mortgage catalogue. It is the first time lending plans like the 90% mortgage have become available since 2008, at the height of the economic crisis. The hope is that giving more first-time buyers the opportunity to obtain a mortgage will finally help the declining housing market recuperate.
Ranging between 4 and 6%, the interest rates on offer are certainly more attractive than they have been in the past for this type of high loan-to-value mortgages. On top of that, the 90% scheme requires a 10% deposit from the borrower, so it does not put any financial strain on a guarantor or the government, unlike other low deposit deals. Some of these mortgage plans also come with a string of appealing benefits, including free buildings and contents insurance for the first year, free legal services and a decent amount of cashback. As opposed to mortgage plans with a lower deposit rate, the 90% scheme offers the additional advantage that the mortgaged property can be sold at any time without the owner incurring a huge financial loss. When looking at the bigger picture, however, the long-term financial benefits for borrowers may not be what they seem.
Apart from the relatively high interest rates, another potential disadvantage of the 90% scheme is that borrowers need to have a good credit rating. People taking on this mortgage plan also need to be prepared to cough up a relatively high product fee and don’t forget that the initial interest rate will only be fixed for between two and five years and could then potentially go up. In some instances, the product fee will be added to the loan after full repayment, which means you will be paying interest on that fee for the entire duration of the mortgage.
Despite the higher costs associated with a 90% mortgage, it is the perfect solution for many first-time buyers who simply cannot afford a higher deposit rate. Financial institutions across the UK have started to realise this too, judging by the fact that the availability of this and similar mortgage plans has exponentially increased during the past year in a bid to get more people on the property ladder. Some lenders like Northern Rock have gone one step further and are offering borrowers a guide to assist them with their first property purchase. This guide not only helps determine the right kind of mortgage plan for them, it also offers step-by-step help through the entire process.
The good news overall is that more and more high LTV mortgage plans are becoming available at constantly decreasing interest rates. Those who keep a keen eye on the ever-changing property market are sure to find the perfect deal to suit their needs.