If you're looking for a 95% mortgage, the market still isn't great.
This article was first sent to Fools as an email in our 'Afternoon' series.
In July I wrote about the future of 95% mortgages in my article, Are 95% Mortgages Next For The Chop? Back then, high loan-to-value (LTV) mortgages were becoming increasingly costly with even the best buy deals offering rates approaching 7%. (High LTV mortgages are for borrowers with small deposits or who only own a small slice of equity in their home.)
Since that time the availability of 95% LTV loans has narrowed considerably. Today just a handful of lenders are still prepared to offer home loans to borrowers with a small deposit.
Nationwide’s new deals
So it should have been an encouraging signal when last week Nationwide launched a range of 95% mortgages. But alas, the lender’s new deals are only available to existing customers who are moving home.
Unfortunately, this is not quite the return to the 95% mortgage market many first-timers were hoping for.
I suspect that Nationwide has re-launched a 95% loan specifically for existing customers who want to move, but have seen the value of their property drop. Many Nationwide borrowers must be in a position where they need a higher LTV mortgage now they have less equity in their homes.
The rates Nationwide are offering on the new 95% home loans are pretty telling too, although it’s no surprise there’s a premium to pay for these more risky mortgages. The two year fixed-rate deal is available at a whopping rate of 7.18%. This is pretty expensive given that the average two year fix stands at just over 5.50%, according to Fool partner, Moneyfacts.
Similarly Nationwide’s new two-year tracker mortgage isn’t a cheap option either. The rate has been set at 3.49% above the Bank of England base rate, so it currently stands at 5.49% (available from 1 January). This doesn’t measure up too well against the average two-year tracker deal at 4.31%, but the mortgage will probably be more appealing to Nationwide home movers than the higher fixed rates on offer.
So Nationwide has failed to come to the rescue of first-time buyers with a small deposit. But is it still possible to get a decent 95% mortgage deal with another lender?
95% mortgages for first-time buyers
| Lender | Rate | Arrangement fee | Higher lending charge | True cost over 5 years |
|---|---|---|---|---|
| Ipswich Building Society | 5.99% standard variable rate | £0 | £2137.50 | £57,573 |
| Bank of Ireland Mortgages | 6.35% fixed to 31/12/11 | £799 | £0 | £55,228 |
| Bristol & West Mortgages | 6.39% fixed to 31/12/11 | £0 | £0 | £54,958 |
| Bristol & West Mortgages | 6.45% fixed to 31/12/10 | £499 | £0 | £53,128 |
| Bank of Ireland Mortgages | 6.55% fixed to 31/12/11 | £0 | £0 | £55,241 |
| Yorkshire Bank | 6.99% fixed to 28/02/12 | £599 | £0 | £57,975 |
| Clydesdale Bank | 6.99% fixed to 31/03/12 | £599 | £0 | £58,130 |
| Abbey | 7.09% fixed to 02/04/14 | £2,499 | £2,400 | £66,331 |
Source: Moneyfacts.co.uk. Figures are based on a mortgage of £142,500 and a property price of £150,000. Loan is repayable over 25 years.
As the table shows, there are now only half a dozen lenders who still offer 95% mortgages to first-time buyers. Ipswich Building Society offers the lowest priced deal at the standard variable rate (SVR) of 5.99%, but borrowers will be hit with a heavy higher lending charge (HLC) of well over £2,000. This makes the loan considerably more expensive on the basis of true cost (which takes into account all applicable fees on top of the monthly repayments).
Don’t forget about the HLC. This fee is supposed to compensate the lender for the extra risk associated with a high LTV mortgage. The fee is often used to buy an insurance policy which protects the lender from financial loss if the borrower defaults on their mortgage payments.
As you can see not all lenders charge an HLC, and since it can add several thousand pounds to the cost of your mortgage, I would suggest you avoid it if you can.
The 95% deal from Abbey is easily the most expensive with an HLC of £2,400, an arrangement fee of £2,499 and a sky high rate of 7.09%. All this adds up to a pretty poor deal for first-time buyers.
Hobson’s choice
With so little on offer in terms of 95% mortgages, there’s a strong argument for delaying a property purchase until you have saved up say, a 10% deposit. Many more deals should become available to you if you want to borrow 90% of the property value, rather than 95%. And building up a bigger deposit should become easier if house prices continue to fall.
But if you decide you want to go ahead with your 5% deposit regardless, remember you will be at risk of falling into negative equity quite quickly. House prices have already dropped 13.9% over the last year (to November 2008) according to Nationwide’s house price index. If this trend is repeated over the next 12 months, borrowers who take out 95% LTV mortgages now will soon owe their lender more than their property is actually worth.
That said as long as you can afford your mortgage repayments, you think your income is reasonably safe in the current climate and you don’t intend to move to a new property for a while, a 95% mortgage may still be an appropriate choice for you.
On a final note, don’t forget you can speak to a broker at The Motley Fool Mortgage Service who will help you find the right deal for you.