The 100% mortgage – friend or foe?

It was only a matter of time before a lender took the plunge and started to offer  a 100% LTV mortgage again.

Aldermore is the first lender post-credit crunch to take the bait, launching a three-year fixed rate of 6.48%, with a £299 booking fee and a completion fee of £999. 

Aldermore will lend up to 75% of the property’s value, with the additional 25% secured against the borrower’s parents, step-parents or grandparent’s property.

Unlike a lot of high LTV deals that have grabbed the headlines in the last few months, the Aldermore deal appears to be relatively straightforward with no requirement for the borrowers’ parents to hand over their life savings or for the borrower to have been saving with the lender for a number of years.

Parents are however required to trust their son or daughter implicitly to keep up to date with their mortgage payments – which I imagine might be a hard task for some parents.

The product has received a mixed response on Mortgage Strategy Online, with some branding the 6.48% rate too high and not Treating Customers Fairly.

The rate is by no means cheap, but unfortunately that appears to be the price a borrower has to pay for the privilege of a 100% LTV mortgage.

The launch of the product at least brings choice to the first-time buyer market, something which it has been lacking of late.

I’m lucky enough to be on the housing ladder but the first question a number of my friends ask me when I tell them I write about mortgages, is “are any lenders offering 100% mortgages?”

These are mostly young professional couples who through no fault of their own just can’t seem to save for a deposit and are stuck at the mercy of landlords who keep increasing their rent every month.

Their parents want to help them, but don’t necessarily have the cash to supply a deposit and their children do not necessarily want to be indebted to their parents.

In theory if you can’t afford to save for a deposit there is the argument that you won’t be able to afford the monthly mortgage payments that come with a 6.48% rate.

But I’m sure I’m not alone in finding saving harder than paying bills. The reality is that as long as it is affordable most people will always find a way to pay their mortgage on time.

No doubt there will be headlines splashed across the front pages of the national newspapers tomorrow vilifying the return of the 100% mortgage, with warnings that borrowers could fall into negative equity.

But as Charles Haresnape, managing director of residential mortgages at Aldermore, says: “Borrowers must be creditworthy and have sufficient income to comfortably afford their monthly mortgage repayments.”

The product is only dangerous when given to the wrong borrower and I don’t imagine Aldermore will be lax in its underwriting.

Although the lender has only launched through three distributors – Connells Group, Arun Estates and 3mc, it will hopefully roll this out to other brokers and packagers if successful.

Aldermore made its first appearance in the Council of Mortgage Lenders’ gross mortgage lending table this year and came in at a modest 21st and just a 0.1% market share.

It would be interesting to know if the bank is also required to set aside a large amount of capital to cover the higher LTV lending. The parental guarantor may act as a get out of jail free card in terms of the extra capital it has to set aside, but even so, it’s no mean feat for the bank to offer this type of lending.

Hopefully its launch into the 100% LTV market will offer some food for thought for some of the larger lenders in the market.