Over the last few months the high loan-to-value (LTV) mortgage has definitely come back into the foreground. The mortgage guarantee element of the Government's Help to Buy scheme has meant lenders are more willing to offer mortgages at 95% LTV, and even those slightly lower down the scale are becoming more widely publicised.
Borrowers now only need to come up with a deposit of 5% to stand a decent chance of securing a mortgage (provided all other criteria is met of course), but it seems that many of them are still cautious about taking the plunge. A lot are in fact realising the magnitude of this kind of loan – taking on a mortgage of 95% is a huge undertaking and will understandably make borrowers wary, particularly with the prospect of a rate rise in the near future.
That could perhaps explain why many are still opting for lower LTV alternatives. A report from conveyancing services provider myhomemove has found that, on average, a UK buyer took out a loan of around 72% of the property price in 2013 – much lower than that offered by a lot of lenders nowadays – despite the mortgage market having improved significantly in the last year.
As with so many things in the mortgage market, there are distinct regional variations. Those in London and the North West borrowed the most at an average of 73.63%, while homebuyers in Wales were particularly sensible and had the highest deposit, on average saving 31.72% of the home's value – meaning they'd need a mortgage of just over 68% of the property price.
This would indicate that buyers are still incredibly cautious when it comes to the amount they're willing to borrow, and understandably so, particularly with high-LTV loans typically coming with much higher interest rates than those lower down the scale.
There are industry expectations that the next year will be the deciding factor in whether or not people swarm to higher loans: "The next 12 months will really show how strongly consumer confidence has returned, and whether people are collectively ready to take on the levels of debt needed for 95% mortgages," said Doug Crawford, CEO of myhomemove.
But, despite the increased availability of high-LTV mortgages, it's still wise to follow in the footsteps of 2013's borrowers and exercise a bit of caution. The question you need to answer is this – even if you could afford to make the repayments now, could you afford to do so if rates rise?
If not it might be sensible to keep saving for that deposit for a little longer, thereby ensuring you're able to get a smaller mortgage and can benefit from reduced rates thereafter. It's particularly important to consider not only with the prospect of a base rate hike by next spring but also given the implementation of the new rules following the Mortgage Market Review (MMR) – these new rules, due to come into force this month, mean lenders have even stricter criteria when it comes to affordability, so if you're struggling then chances are you won't be able to take out a high-LTV mortgage anyway.
Of course, if you can comfortably afford a 95% loan then the influx of high-LTV mortgages will be welcome, and now's a great time to get on board and take advantage of low rates while they're still available.
You could always opt for a mortgage that comes with an overpayment facility too, giving you the chance to make extra payments and reduce your LTV by the time you need to remortgage. It all comes down to you and your financial situation, and as long as you know how much debt you're taking on there's nothing to stop you from enjoying your dream home – no matter how much you're able to save.
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