Whenever I see the term 100% LTV mortgage, I can’t help thinking back to the mortgage madness in the run up to the financial crash.
Fortunately, the latest deal from Lloyds Bank isn’t a stand alone 100% mortgage as it’s supported by a 10% deposit in a separate 3-year fixed rate savings account from a family member.
The mortgage rate is fixed for three years at a competitive rate of 2.99% – and thankfully from a cash strapped FTB perspective there’s no product fee payable.
To allow the bank to grant the 100% mortgage a family member must deposit 10% of the purchase price in a separate savings account.
The savings account is fixed for 3 years and pays a market leading rate of 2.5% and as long as the mortgage repayments have been made on time and are up to date at the end of the 3 year term, then the savings balance is returned to the family member(s).
There are some points the borrower needs to be aware of as follows:
- The mortgage can’t be used for new build properties.
- Maximum mortgage is £500k
- Either the borrower or family member must open a Club Lloyds current account before the mortgage is taken out – this account requires the customer to pay in at least £1500 per month – if not there is a £3 monthly fee payable.
- With the uncertainty of Brexit looming large it’s difficult to know what will happen the house prices in the next three years. If house prices stay frozen at their current level, then after 3 years of repayments (on a 30-year mortgage) the borrower will be left needing a 93.5% LTV mortgage come 2022.
- You would hope that Lloyds Bank would provide a follow-on product for such customers with such a high LTV and not leave them trapped and with no other option of moving on to Lloyds Bank SVR which is currently 4.24% and could well be higher if rates rise in the next 36 months.
- For someone with a £150k mortgage (30 years) having to move from 2.99% to 4.24% (SVR) after 3 years would see monthly repayments jump from £630 to £725 per month.
More needs to be done to help borrowers get on to the housing ladder so it’s good that a high street bank is being creative and offering a different way of buying.
Lloyds isn’t the first bank to offer such a scheme as Barclays has been offering its Family Springboard mortgage option for a number of years now.
Whether would be borrowers or family members will be prepared to open a Lloyds Bank current account to get this mortgage or whether they see it as a step too far remains to be seen.
The family members will like the fact that they can help their children with their first home purchase knowing that they will get it back after 3 years. However, they should be aware that if repayments are not maintained then the bank won’t release the funds back on the third anniversary.
If all repayments are up to date but in three years’ time the borrower is in negative equity because of a fall in house prices, the family member will have their 10% savings stake returned.
Although Lloyds will lend 100% the applicants will sill need to prove they can meet the bank’s affordability criteria.
The danger with high LTV mortgages is what happens if house prices fall and the borrower is left with a high LTV balance that they can’t find a lender to take and they are forced into SVR – or in some cases they could fall into negative equity – it’s something they should weigh up – especially at the moment with the current economic uncertainty in the UK surrounding Brexit.