The Decline Of 90% Mortgages In The UK | Mortgage

by RichardPBest

90% Mortgages, which can also be termed 90% loan to value mortgages or simply 90% LTV mortgages, are mortgages which are available to cover an amount of up to 90% of the value of a property. So for instance, if you were buying a property for 100,000 a 90% mortgage would be available for up to an amount of 90,000.

You can usually apply for a 90% mortgage if you are either purchasing a property or remortgaging a property which you already possess.

So why is it not possible to simply obtain a mortgage to cover 100% of the properties value? Why must a deposit of 10% be provided?

You have to pay attention to the significance of 'equity', which has a great importance to both Borrower and Mortgage Lender. The term 'equity' in respect to property, refers to the value that is tied up in a property asset. It is the difference between the market value of a property and the amount of borrowing outstanding on said property. It is the amount of money that you would receive after selling your property and paying back your mortgage balance.

If your property value falls to less than the value of your mortgage, then you are in what is called a "negative equity situation". You owe more on your mortgage than your property is worth and therefore your property has become a "liability" not an "asset".

So why should you be concerned about negative equity? A situation of negative equity holds an inherent risk for both the mortgage borrower and the mortgage lender. The mortgage lender holds a charge over the mortgaged property, which it holds as security for the loan. Should a borrower default on paying their mortgage, the lender has the right to start repossession proceedings with a view to gaining possession of the property and selling it in order to recover the defaulted mortgage debt. But in a negative equity situation, the lender is unlikely to be able to recover the full mortgage debt and may suffer a loss.

The negative consequences for you, the borrower, include being stuck unable to sell your property if you wanted to, unless you could come up with the additional money required to pay off the mortgage in full. Little, no or negative equity also keeps you trapped in your current mortgage deal, as no other mortgage lender will be likely to want to take your business.

So as you can see now why equity is so important, and why higher loan to value mortgages pose a greater risk, it is clear to see why this type of mortgage has declined following the credit crunch. Prior to the credit crunch, 90% mortgages were readily available. As the property market was on an upward curve, the chances of a 90% mortgage falling into negative equity seemed remote. It was more likely that the margin of equity would increase rather than decrease. But since the credit crunch, and the resulting economic down turn - the housing market has at best stagnated, and in many areas of the UK house prices have fallen significantly.

With economic instability, and fears of a period of housing market decline through 2011 into 2012, UK mortgage lenders have become increasingly reluctant to lend money except on lower loan to value mortgages. Therefore, it is no longer possible to obtain mortgages at a higher loan to value than 90% for most borrowers in most situations. Even though 90% mortgages are the highest loan to value mortgage available, there has been a rapid and alarming decline in the number of approvals for this type of mortgage. In 2006 there were some 245,000 90% mortgages taken out in the UK, but this has dropped to just 28,000 in 2009. This in itself is having a bad effect on the housing market, as 90% mortgages were traditionally very popular products for first time buyers. The housing market relies on a steady supply of first time buyers into the system, and hence this decline hurts us all.

It is likely that 90% mortgages will return to a level of greater availability in the future, although this may not happen for some months or even years. Until the market finds a way to help first time buyers onto the property ladder again, this period of price stagnation is likely to continue unabated. Will 90% mortgages ever return to the 2006 levels? That is very unlikely, and it seems that for now 90% mortgages have had their hay day.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

If you would like to read more about 90% mortgages then here are some great resources : 90% mortgages explained and 90% mortgages for first time buyers.