The new 120% mortgage
Robert Powell takes a look at Lloyds TSB's new mortgage for home owners who want to move but are being held back by negative equity...
If you thought the days of 120% mortgages - where mortgage lenders agree to lend borrowers 120% of the value of a property - were long gone, never to return: think again.
Lloyds TSB has just launched a new mortgage deal that allows its customers to do just that.
The difference is, unlike those pre-credit crunch mortgages that were offered to first time buyers without a deposit to help them get their feet on the first rung of the property ladder, this mortgage is aimed at 'second steppers'.
Second steppers are home owners who are looking to move but are unable to do so due to poor or negative equity. These unlucky mortgage borrowers typically bought their first home at the peak of the market four or five years ago and are now looking to either relocate or move into a bigger property.
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Many of these people will have bought up flats and new-builds on high loan-to-value (LTV) mortgages. The problem is that the average price paid by a first time buyer has dropped by £28,041 over the last three years and flats and new-builds have fared even worse than usual.
As a result one in ten second steppers are estimated by Lloyds to be in negative equity with double that number not having sufficient equity to move (less than 10%).
Lloyds’ figures also show that the average difference in deposit between first and second properties now stands at £48,216. This means a second stepper would have to put away £982.94 each month for four years to be able to move. And that’s before you even consider the £5,422.68 that second steppers estimate they’ll have to pay in extra costs and fees when they move.
Factor into this the lack of high LTV mortgages (there are now only 199 products at 90% LTV, compared to 897 three years ago) as well as the generally subdued nature of the market at the moment and it's easy to see why a bottleneck of these 'second steppers' might be throttling the life out of the property market.
Think about it: you can’t get new people onto a ladder if a load of people are stuck standing on the bottom rung. That's bad news for property prices all the way up the property chain - and it's especially bad news for first-time buyers.
First time buyers
As you would expect, 84% of second steppers hope to sell their property to a first time buyer, but unfortunately they’re not having much luck. Nearly a quarter have had their property on the market for between 6 and 12 months, one in five haven’t had any viewings of their property and 56% have not received any offers.
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The problem lies in the fact that second steppers are reluctant to drop their sale price to realistic market levels for fear of negative or low equity. But the lack of affordable mortgages floating around at the moment means first time buyers aren’t able to fork out anymore than the current market price.
In fact, second steppers are so reluctant to lose money on their home they would rather rent it out, sell it to a landlord or just stay put until the market recovers than drop the price. Unfortunately this is blocking up the options for first time buyers by taking a lot of affordable property out of the market altogether.
Equity leg up
To solve this problem, Lloyds TSB has decided to effectively offer the second steppers on its books a leg up onto the second rung of the property ladder. It believes this will not only benefit second steppers but will in turn free up housing for first time buyers and give the market a much needed kickstart.
What is the Lloyds TSB 120% mortgage deal?
The scheme works like a portable mortgage, allowing you to use your hard earned cash to put down a deposit on a new property rather than plug the gap caused by negative equity. You can trade up, down or buy a property of a similar value but, most importantly, you won’t be able to increase the size of your mortgage – any extra money you need to buy the property must come from your own pocket.
The deal is only available to existing Lloyds mortgage customers and you’ll only be eligible if you’re negative equity is 120% LTV or less.
If you can afford to buy a higher value property using this scheme, the money you put down as a deposit will, of course, reduce the loan-to-value of your mortgage. Take this example:
Current mortgage: £130,000
New mortgage: £130,000
Current property worth: £110,000
New property worth: £120,000
Current LTV: 118%
New LTV: 108%
Additional customer deposit: £10,000
Source: Lloyds TSB
Of course, you've had to invest £10,000 in a new property to make the move shown above - and the property is still worth less than the mortgage.
Yes, unlike the risky 100%+ LTV mortgages we saw being offered before the credit crunch, borrowers aren't taking on any extra debt by taking out this mortgage. But there still is a risk for borrowers who decide to step up and put down their savings to buy a higher value property. If you lost your job or somehow failed to keep up the payments on your mortgage and the property was repossessed, you'd lose all the extra money you'd put down as a deposit for the property. Lloyds TSB would be entitled to take the entire proceedings of the sale of the property due to the high LTV.
In other words, if the property were to be repossessed, Lloyds TSB would benefit from the extra money you'd invested into the property - not you.
For this reason, this scheme is best suited for those looking to relocate to a property of the exact same value – not, in fact, those who want to step up the property ladder to a more expensive property. Keep your money in your savings account!
Who’s it for?
The scheme is only available to existing Lloyds TSB mortgage customers and is not currently being rolled out to brokers.
Lloyds estimate that 80% of second steppers are aged between 25 and 34 years old, four out of five are either married or living with their partner and their mean household income is approximately £51,400.
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Will it work?
Due to its extremely limited availability and the risks for those who put down deposits in order to move to more expensive properties, Lloyds’ scheme is far from the market moving mortgage that they may like to think it is.
But nevertheless, for some borrowers in negative equity who want to move home, it will be a helpful option.
Personally, despite its flaws, I'm in favour. I think schemes like these could be a vital lifeline for those forced to relocate due to large-scale public sector redundancies. And morally speaking (if there is such a type of speech in the mortgage market!) it’s also right that lenders who sold buyers 95%+ deals back in the boom years offer appropriate rates for those same customers who are now looking to move up the property ladder.
Several other lenders do in fact offer similar negative equity deals, but they are issued on a case by case basis and are seldom advertised. Perhaps this is unsurprising after the critical reaction Nationwide received back in 2009 after it began publicising its new 125% mortgage.
But as Lloyds’ research proves, consumer sentiment is altering and with both buyers and lenders wary of another housing bubble, perhaps high LTV mortgages could now be part of the solution, rather than the problem. Let us know your thoughts using the comments box below!
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