The fall and rise of the 100% mortgage in the UK

One of the features of the credit crunch era has been the way that the various establishments make all sorts of promises along the lines of “never again” and then after a delay return to past behaviour. A type of reversion to mean if you like. If we look back to the pre credit crunch era then the peak of if you prefer nadir for one type of behaviour was the 125% mortgages under the Together banner issued by Northern Rock and yes you could borrow 25% more than the value of the property the mortgage was secured on. What could go wrong? Sadly many borrowers found out.

Actually this was not the only problem with Together mortgages as this from the bad bank NRAM which holds them now shows.

For example, a Together customer with a mortgage of £100,000, a loan of £15,000 (both still with NRAM) and a current interest rate of 4.79% with 15 years term remaining would be paying £60 per month on just their £15,000 loan.

Yes they involved an unsecured loan which has mostly got forgotten over time but this added to the debt burden by being over the mortgage term rather than say the 5 years or so of a loan. The advertisers call this helping with monthly payments, but look what it does to the total debt. This is illustrated by taking a loan at a higher interest-rate but crucially for a shorter period.

Switching the £15,000 loan to a 5 year deal elsewhere with an interest rate of 5.99% would mean a new repayment of £290 per month, which does sound like a big increase.

But the loan would be paid off a whole 10 years sooner, saving a whole £16,394 in interest payments.

The return of a 100% mortgage

You might think that such a thing was not possible as back in the day there was a queue of politicians telling us that such things were a sign of irresponsibility in the system. From the Guardian in 2009 from the Liberal Democrats Treasury Spokesman.

In the current housing market, with prices falling steadily, the 100% mortgage is an insane risk for any lender……most people would surely accept that we need to restore greater responsibility to money lending.

From the BBC on the 22nd of February 2009 and the emphasis is theirs.

Banking minister Lord Myners has said banks were “foolish” to offer 100% mortgages, after Gordon Brown called for “prudent and careful” lending.

Lord Myners said costly lessons had been learned worldwide “about reckless, feckless, witless lending”.

Here was the conservative party spokesman.

Shadow treasury chief secretary Philip Hammond accused the prime minister of “trying to shut the stable door on irresponsible lending long after the horse has bolted”.

Some of you are probably already singing along with Carly Simon.

But if you’re willin’ to play the game
It’s comin’ around again

Barclays Family Springboard

Let us examine the details and here is the opening pitch.

Apply for a Family Springboard mortgage of up to £500,000 on a property in the UK, without a borrower deposit.

The details remain in a world where a 5% deposit was required but the Press Association is more up to date.

Customers with an income of more than £50,000 will be able to borrow up to 5.5 times their income, up from a maximum multiple of 4.4.

I suppose that would have to raise this amount for the thing to work and the interest-rate is show below.

A buyer without a deposit could get a three-year fixed rate of 2.99% under the family springboard mortgage

Seems very cheap for a 100% mortgage does it not? But of course most interest-rate rates seem like that these days.

Bank of Mum and Dad

These are required here but only for three years and the deal is sweetened for them as shown below.

They open a Helpful Start Account with 10% of your purchase price at the same time you apply….They get their savings back after 3 years with interest, as long as you keep up the repayments.

If we start with their position they will get an interest rate of 1.5% over Bank Rate so 2% currently which is pretty good considering. Crucially they are only backing the payments for the first three years and then get their money back plus interest. Their intervention leaves us with a curious somewhat bi-polar situation where the borrower gets a 100% mortgage but the bank would argue that it only has the risk of one of more like 92% if we allow for the fact that it will have reduced during these three years. Of course we are then left with the issue of whether 92% is too high at this level of house prices.

We know that the Bank of Mum and Dad or BOMAD is rather busy these days.

Analysis by Cebr for Legal & General shows that, as of 2016, a quarter (25%) of all homeowners received help when they bought the home they live in.

Indeed the numbers below are rather eye-catching.

Based on the figures and home purchase prices, we estimate that, in total, family and friends will spend £5bn in 2016 to help support the purchase of £77bn worth of property. This puts the Bank of Mum and Dad in the top ten mortgage lenders in the UK.

There are quite a few issues here and the most obvious is this one.

The Bank of Mum and Dad is not adequate in that it fails to address the needs of those without parental wealth,

To Infinity and Beyond

Well for many of us anyway as we note this development from last month. From Hodge Lifetime.

The 55+ Mortgage is an interest-only mortgage available to borrowers aged 55 or above…….The maximum term we allow is up to when the youngest borrower reaches age 95.

Youngest borrower reaches 95? That pretty much covers everyone does this not? It also sets us further down the road which Japan travelled as it headed towards what are called intergenerational mortgages. A little care is needed as the old limits at 65 are out of date with flexible retirement terms and increasing life spans but it is hard to have any support for a mortgage which is interest-only and goes to 95. What court would enforce terms on a 95 year old……

The Bank of England

The Financial Policy Committee wants us to think this.

the FPC remains vigilant to risks in this area.

Meanwhile it peruses the Bank of England tea trolley to see what cakes are on it and dreams of the menu for luncheon.

Comment

There is much to consider here and it is typical of the times that we have a mortgage which is in one sense a 100% one as in from the borrower’s point of view whereas from the bank’s point of view it is more like a 92% one. Also on the 10% BOMAD “Helpful Start” it makes a turn by paying 2% to them but charging 2.99% on the mortgage. I also note that the mortgage borrower will be paying interest on the amortised value of the full loan rather than 90% so over time that will be expensive.

Everybody is happy? Well if house prices have gone up yes and not to bad if they have stayed the same but difficult if they have fallen. On that front I have some worrying news for you provided by Legal and General.

Of 88 economists questioned by the Financial Times to assess the impact of government policies, none expected a general fall in prices.

Oh and of course all this is happening at a much higher level of house prices compared to earnings than before.

 

 

 

 

 

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15 thoughts on “The fall and rise of the 100% mortgage in the UK

  1. Happy Star Wars Day Shaun!

    indeed it seems our Bankers are in a “galaxy , far ,far ,away ….”

    Why would they need to do this ?

    well as the Pet Shop Boys sang – “its a sin” for houses to fall in price …

    lord knows our Bankers are bust as it is , heavens forbid if they need “Flash Gordon” to rescue then again ( he’ll save everyone of us ! – Queen ) ….

    Oh well back to the popcorn

    Forbin

    • May the force be with you Forbin and indeed all readers.

      How many times will we need to be saved? I saw an FT headline flash through earlier that RBS would do its main restructuring in 2016. That makes it like 2015,14,13,12,11 and 10 then so far anyway.

      The only way is up (allegedly).

  2. The Ponzi needs fuel and debt is that fuel. This will keep on until the next crisis at which point everyone will say: “we never saw it coming” and the banks are bailed out for the second time.

    But the truth is it’s getting more and more difficult to sell this to an increasingly sceptical public and one does wonder if this will, in the final analysis, be possible the second time. The trigger point may be where we have a bail in and this reaches retail depositors, in which case the bets are off as to what the end result might be. We’re getting there slowly.

    • Hi Bob J

      I regularly ask people why bad economic news is always unexpected when “experts” have made the forecasts? But the message gets ignored and the same crew seem to go on in spite of a poor and in some cases shocking track record.

      A banking bail in seems most likely currently in Italy as the new bank fund is already struggling although Portugal has long been on my list. Even in the UK I think that deposits are only safe up to the level of the guarantee scheme which itself sometimes changes.

  3. Hi Shaun
    I’ve worked out a formula to
    find out when it all goes pear shaped:-
    Infinity divided by the square root of minus
    one!

    Bad Finger

    Did I hear you say that there must be a catch.
    Will you walk away from a fool and his money.

    JRH

    • Hi JRH

      As I do not know what infinity is then I might reply that I know even less about dividing it by i where i squared equals minus 1! But on reflection I am in the same mess…..

      Your formula should be in The HitchHikers Guide To The Galaxy.

  4. “What court would enforce terms on a 95 year old……”

    Well the Banks run the country so I guess they will run the courts …..

    Forbin

  5. Hi Shaun thanks for this spot on about those lying weasel absent minded politicians (I am being polite)!
    Government I thought good governance was implied in the word but no with their allies the Banksters the politicians want to enslave the population in a web of debt.
    As I have stated before banks have redefined the term organised crime.
    The help to buy schemes and other con tricks are only their to keep house prices high and yet the population can’t see it.
    How much debt before the Ponzi scheme collapses which it most certainly will or they may start WW3 to avoid the inevitable.

  6. Of course the banks will repeat the past, moral hazard, when it goes wrong they still do well. To avoid such perverse incentives, they need to let all the failed banks join Lehman in bankruptcy and enforce some basic fraud laws …..

    Rescueing the banks last time has made many countries dangerously over endebted. Can the countries finances survive a repeat of 2008 ? Or will we see an inflationary episode as is currently troubling Venezuala ?

    • Hi ExpatInBG

      In essence we needed to grow our economies enough to offset and hopefully exceed any burden from the higher debt. The irony is that in so many places it is the banks which have stood in the way of the necessary growth.

      As to what would happen it would be a deflationary type of inflation I think.

  7. Hi Shaun,
    As before any increase in levels credit you make available just gets sucked up in the form of higher house prices and then the cycle starts again. It reminds me of when you get a massive binge-drinking hang over. The next day you swear you won’t touch another drop but eventually you forget how bad it feels and do it all over again. It seems eight years down the line they hope we’ve forgotten how bad it can get so in the words of The Housemartins it must be happy hour again.

    • Hi Zummerzetman

      I think your binge drinking analogy covers our establishment rather well. If we take it forwards then happy hour in terms of mortgage rates has continued to get cheaper, how long can that go on?

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