According to a recent study by the Royal Institute of Chartered Surveyors (Rics), consumer confidence in the economy is at a ten year low, and the decisions of four of top UK mortgage lenders to pull their 100%-plus mortgage products last week did nothing to bolster the public's confidence.
This latest affect of the credit crunch is going to put a strain mainly on first time home buyers and on first time buyers who are looking to remortgage. More and more lenders are becoming increasingly wary of who they are lending to and of the amount of risk involved with lending to them. Due to this, lenders are beginning to pull a number of their high risk products off the market. Among these is the 100%-plus mortgage.
The 100%-plus mortgage is meant for first time buyers. It is a 95-100% mortgage with an additional unsecured loan tacked onto it. This type of mortgage allows first time buyers to get on the property ladder by affording them enough money to not only purchase their home but to give them enough money for the deposit on their property or for necessary home improvements that need to be made right away. The advantage of this type of mortgage is that it covers all the associated costs with buying a new home, but the con is that lenders allow new borrowers to get in a bit over their heads by offering them an additional unsecured loan on top of their mortgage.
Alliance & Leicester was the first lender to pull their 125% PlusMortgage this past Tuesday. Director of mortgages at Alliance & Leicester, Stephen Leonard, said that the current market condition is the reason for taking their 125% PlusMortgage off the market.
Coventry Building Society was next to pull their MOREgage product from the market on Friday of last week. Colin Franklin, head of sales at Coventry, said that applications for this product had dropped to a negligible number and that it was no longer cost effective for Coventry to offer their 100%-plus mortgage product to borrowers.
Abbey Mortgage and Godiva Mortgages followed suit later on Friday when they stopped offering their 100%-plus mortgage products. Birmingham Midshires is still offering their 100%-plus mortgage product, but they say they're considering pulling it this week. Northern Rock also continues to offer their 100%-plus mortgage product, but they have raised rates on the product to a level that is less competitive than it used to be. Analysts believe that once the bank is publicly owned, they will pull the product as well due to the sensitivity and controversy associated with this type of mortgage.
Around 20,000 borrowers take out a 100%-plus mortgage annually. These first time borrowers will have a hard time finding an affordable remortgage deal now because of the lack of similar mortgages available now. Similarly, many potential first time buyers may be turned off to buying if they are unable to get a 100%-plus mortgage because they may be counting on the additional funds from the unsecured loan to make the deposit on their property. With the decreased availability of and higher interest rates on first time buyer mortgages, it is going to be hard for people to start climbing the property ladder.
Of 123 prime lenders, only 28 are currently offering 100%-plus mortgages. This is compared to November of last year when 41 of the 123 lenders offered this type of product.
Louise Cuming of MoneySuperMarket.com said, "With so many prominent lenders exiting the 100%-plus mortgage market this week, consumer confidence is going to be knocked again...It is disappointing that lenders are adding to the panic."
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