Mortgage Madness

Thursday, 3rd April 2008 09:17 - by Resident IFA

It’s crazy out there! I have been actively involved in the Mortgage market for over 5 years...a period in which lenders have become ever-more competitive, always looking for a niche they can exploit and commercial advantage they can gain on their competitors. This has led to such gems as the 130% mortgage, where 95% of the loan was secured on the property and 35% effectively a personal loan at the same interest rate. Worse still, this was available to First-time buyers. The problems arise when these borrowers come to the end of their ‘Preferential product’ rate period and have to consider taking a new product from their lender or re-mortgaging. Taking Northern Rock as an example, products have moved on from the 5% or so rates of 2 or 3 years ago, a reasonable example now being a whopping 7.24% for some products they offer (Source: www.northernrock.co.uk). Using the example of a borrower experiencing the above interest rates and originally having a £100,000 Repayment mortgage over 25 years, this could now add approximately £135 per month to their outlay (assuming £97,000 now owed over 23 years). This calculation is just for the mortgage. What if you had, say, 30% or so more as an unsecured loan from a lender? (See above). First of all, it is not guaranteed that a personal loan provider will see these two debts (Mortgage and unsecured loan) as affordable together and be able to re-finance. If they do, it may well be that the rate approaches 10%. Again, using my above initial mortgage rate example, this means they move from around 5% to 10%...I won’t scare you by working through those figures! Add to this scenario the fact that HSBC/First Direct announced yesterday that they are not lending to new customers for the time being, it all looks pretty miserable. I can’t end on that note, though. The extreme tightening of lending criteria, minimal inter-bank lending, and the attendant interest rate increases (Good old supply & demand!) are actually taking finance back to a more prudential era. I would play Devil’s Advocate and say that it is a brilliant turn of events that 130%, 125%, and 100% mortgages are now pretty much defunct – why on earth purchase a house if you can’t at least save up a 5% deposit first?! Until next time...