Article by Sam Griffin - 21st December 2020

First-time Home Buyers Rejoice As 90% Mortgages Return

Good news for first-time home buyers, as lenders are starting to offer 90% mortgages again.

Lloyds Banking Group is the first set of lenders to bring back high loan-to-value mortgages since the industry-wide retreat from first-time buyers in March.

Since 8 December, borrowers have been able to apply for a 90% LTV mortgage with Lloyds Bank or Halifax – meaning only 10% of the property value is required as a deposit.

While 10% may still be a substantial sum, it is significantly less than was required through the summer lockdown period, when mortgage deals for first-time buyers had dried up. This was primarily due to the impact of Covid-19, the following uncertainty in the property market, and worries over the income of first-time buyers, who were expected to be one of the groups hardest hit financially by the pandemic.

There are some important conditions to know before you start applying for these new mortgages from Lloyds:

  • a maximum of £500,000 can be borrowed
  • the loan cannot be more than 4.49 times larger than yearly income
  • the mortgages are incompatible with Help to Buy schemes or new builds

The return of 90% LTV mortgages is generally being seen as a sign that confidence is returning to the property market, after coronavirus dashed more than just the hopes of first-time buyers earlier in the year.

It’s not just Lloyds and Halifax relaunching low-deposit mortgages as Virgin, Yorkshire bank, Nationwide are joining them with their own offers targeting first-time buyers.

But that’s not to say that lenders are being lenient: acceptance criteria is likely tougher than ever.

What kind of criteria do high LTV mortgages have?

Mortgage lenders tend to charge higher interest rates on high loan-to-value mortgages to offset the risk involved in lending such a high proportion of the property value. The rate appears to be around 4% for these mortgages, which is high considering we currently have the lowest Bank of England base rate ever. In fact, Defaqto has found that these 90% mortgages are 12% more expensive than this time last year.

The lending risk is even greater with first-time buyers who tend to be younger and so may earn less than older existing homeowners. Because of this, stringent criteria will be applied to income, outgoings, and debt levels to ensure that you are able to comfortably make the repayments each month.

This usually involves putting your finances through a stress test – a hypothetical worst-case scenario, such as higher interest rates, reduced income, etc. – to make sure you can afford the mortgage, not only now, but also in the future should your finances take a hit following redundancy or recession (as just two examples).

Negative equity is a real risk with high LTV mortgages, as a drop in house prices can leave you owing more than the house is worth – something both you and the bank will want to avoid, as you’ll still be in debt even if you sold the property.

As 90% mortgages have a relatively high lending risk, the required creditworthiness of the applicant is similarly high. Even the slightest negative information lodged on an applicant’s Credit Report, which might have even been ignored if applying for a lower LTV mortgage, will have a greater adverse impact on the application.

Negative information comes in many shapes. Late payments are most common (and least severe), but there’s a range of entries that might end up on your Credit Report, including arrangements to pay, defaults, and CCJs.

You can find out more about negative Credit Report information by checking out our previous article.

In short though, the only way to know what’s on your Credit Report is to check it yourself.

What about first-time buyer 100% mortgages?

100% mortgages do exist, but they are rare, expensive, and often risky for first-time buyers. They were more common before the 2008 financial crisis, but more responsible lending and tighter regulations have led to ‘no-deposit’ mortgages being a rarer sight nowadays.

The most common type of 100% first-time buyer mortgages are ‘guarantor’ mortgages, which involve a family member acting as a guarantor for the mortgage – essentially meaning they take on responsibility for the debt if you fail to repay.

As 90% mortgages are only just returning to the market, it is unlikely that there will be a significant resurgence in ‘no deposit’ first-time buyer mortgages any time soon, especially in the midst of a pandemic that has shaken lender confidence.

How do I check my Credit Report before applying?

It’s always a good idea to check your Credit Report well in advance of applying for a mortgage, but this is especially true when going for one of these new 10% mortgage deals as the lending criteria will likely be unforgiving. The state of your Credit Report really is more important than ever.

If you’re planning on applying for a mortgage, don’t let something unexpected spoil your chances. You can see your complete Credit Report information from Equifax, Experian, and TransUnion by using checkmyfile. You’ll be able to see the information that a mortgage lender will see when they run a credit check on you, whether they use one or all of the Credit Reference Agencies, so you can apply with confidence knowing that you’ve seen everything you need.

If you haven’t already, you can check your Multi Agency Credit Report free for 30 days, and then just £14.99 per month, which you can cancel online at any time.

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