'95% Mortgage' Isn't What It Seems

Mortgages and Home

Updated on 17 February 2009 | 3 Comments

Skipton Building Society claims it's going against the current market trends by launching a new 95% loan-to-value (LTV) mortgage. But the new deal is not all it seems.

Skipton Building Society claims it's going against the current market trends by launching a new 95% loan-to-value (LTV) mortgage for first-time buyers. But the new deal is not all it seems and here's why.

Called `Mutually Exclusive', the scheme will launch on Monday 15th September and will allow first-time buyers to borrow up to 95% of a property's value. However, the sting in the tale is that a family member will need to save a set amount in a Skipton savings account `under charge' - which effectively means that the money is at risk if the buyer falls behind on mortgage repayments.

The amount of savings under charge will be calculated from 75% of the property value. For example, on a £100,000 property, if the borrower requires 95% LTV, Skipton will take a charge against £20,000 of savings. Effectively this means that between the borrower and their family, a 25% deposit is needed, albeit with some of the cash regarded as `savings'.

Loan-to-values

LTVs have become a big issue in the credit crunch. Lenders previously happy to lender 90, 95% or even 100% plus of a property's value have lowered their maximum LTVs on their best products. Some institutions won't lend to anyone who can't stump up a 15 or 25% deposit.

For first-time buyers trying to get a deposit together this presents a huge problem; someone buying a £200,000 property and needing a 25% deposit will have to save a massive £50,000.

The idea behind Skipton's Mutually Exclusive scheme is that while the first-time buyer will only need to raise a 5% deposit, their family can put up some of their savings as a guarantee against the loan. However the savings must be invested in a Mutually Exclusive Account, which is a savings account currently paying 4.85% gross. The savings become at risk if the borrower defaults on the mortgage repayments.

Not the best place for savings

Although not the worst savings account on the market, the Mutually Exclusive rate is a long way from the top of the tables where instant access accounts commonly pay 6% plus and fixed rate bonds 7%. So parents tying in their savings to help their kids on to the property ladder won't be getting the best interest rate.

Another issue is that for properties over £175,000, the savings balance would exceed the £35,000 amount protected under the Financial Services Compensation Scheme so in the unlikely event of Skipton going bust, savers could lose some of their cash.

In my opinion, if you have a parent willing to commit such significant sums of money to a tied savings account, you might as well use the money as a deposit and get a better mortgage elsewhere. After all the terms of Mutually Exclusive mean that you can't make any withdrawals while the charge is in place - and it will remain in place until the loan is repaid or until the property's value has gone up enough to change its equity position (unlikely  in the current falling market).

Interest rates

As for interest rates, mortgages from the society currently available to 90% LTV will be available to 95% for Mutually Exclusive borrowers. Currently these include a two-year fix at 5.89%, a three-year fix at 6.44% and a five-year product at 6.34%. While these rates are Ok, they're not best buys.

The devil is really in the detail with the Mutually Exclusive mortgage which, on closer inspection, turns out to be a 75% mortgage by another name.

More: Is A 10% House Deposit Enough? | Compare mortgages and savings accounts via Fool.co.uk

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