125 Mortgage No Reason To Panic – US-FOREX.US
Will anything ever change in Britain as a result of the financial crisis? Not only has Finance Minister Alistair Darling shied away from a radical overhaul of financial regulation with his latest proposals, but on Thursday cooperative bank Nationwide also seemed to hark back to the old ways with a mortgage product offering 125% of a property’s value. Might this be evidence of another bubble on the horizon?Not quite. Nationwide’s 125% product, which has only been on the market for a month or so, is at heart a 95% loan-to-value mortgage with an extra buffer zone for homeowners trapped in “negative equity”-or when a house is worth less than its mortgaged value. Nationwide allows consumers to transfer some of this negative equity to their new property, up to a limit of 125%, when they are looking to move home. It’s a specific service for a “very small number of customers,” according to Nationwide.By comparison, market leader Lloyds Banking Group
offers 95% mortgages under the Lloyds brand and 90% mortgages under the Halifax banner, with various measures to attract first-time buyers. Consumers trapped in negative equity are dealt with on a case-by-case basis. As for Northern Rock, which in the golden years of the mid-2000s did offer 125% mortgages, it now has a slightly more restrained loan-to-value ceiling of 85%.This does not remove the risk that, as the British property market stabilizes, lenders will start to compete more aggressively for borrowers and offer much better-perhaps irresponsible-terms. “Right now, I can’t see any sort of problem, but it will happen again in the future when the market begins to rise,” said Liam Bailey, head of residential research for real-estate agent Knight Frank. “Lending becomes more lax, it becomes easier to access debt.” A market turnaround may not be far off. Research from Lloyds tracked a 0.5% decline in average house prices between May and June of this year, which would suggest the worst has passed, while policymakers in Britain are keen to drive lending and stimulate the mortgage market to spur the economy.But for the time being, obtaining a big mortgage is not easy or cheap. Even though interest rates in Britain have been slashed to 0.5%, with the Bank of England also embarking on a money-printing program to stimulate the economy further, borrowers can still expect to pay around 6 or 7 percentage points above the base rate for a fixed-rate, high loan-to-value mortgage.
“There’s no doubt that you can get hold of high loan-to-value mortgages but you get penalized on the rate you pay,” said Bailey. “The reality is the mortgage companies are quite happy to lend people lots of equity.” He said that there were fewer competitive pressures in the mortgage market, with many lenders having closed their doors or joined forces, contributing to a shrinking of the mortgage pool.According to Selwyn Lim, director of property research firm Mouseprice, lenders’ lax vetting procedures during the boom times were also to blame. He said that some buyers had managed to get even higher loan-to-value rates than offered by the banks. As an example, Lim said that developers had even offered cash payments to buyers upon completion, an attractive top-up when combined with the mortgage itself. “I would like to think that lenders would have wised up,” said Lim.