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90 per cent mortgages back with a vengeance

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United Kingdom  LTV  First Time Buyers  Loan To Value  High LTV Mortgages  Bankruptcy  UK central bank 

90 per cent mortgages back with a vengeance

By - Thursday 01 December 2011

90 percent mortgages are becoming more and more common, and some banks/building societies are even offering 95% LTV mortgages on a localised basis. There is even talk of a return of 100% LTV mortgages in 2012.

This is both good and bad for the housing market. On one hand it will make buying a reality for more first time buyers. On the other house prices are still very volatile. A fall in prices will take anyone who gets a 100% LTV mortgage next year into negative equity, and even a 10% fall in real terms can't be ruled out in many areas of the UK. This would certainly spill many of these new first time buyers straight into the quagmire of negative equity, which is one of the biggest factors in crippling the market in the first place, not least because of the numbers of people who strategically defaulted on their loan.

Strategic default is a new term born out of the bailout era. Until recently you borrowed money, you paid it back, and if you couldn't pay it back you were bankrupt and your assets seized etc. Nowadays you borrow money, and if you can't afford to pay it back you can just get a bailout, that is if you owe enough to really matter. When banks are getting bailouts on money they owe, you can't blame people for bailing out of paying a mortgage for more than the house is now worth.

Anyway, digression over, apart from possibly being bad for the buyers, such high LTV mortgages could also be bad for the still-fragile economy. In the first place it would be bad for the economy if prices fell after the loans were taken out, if only in terms of it hitting consumer confidence especially hard among those who bought using these glistening mortgages.

But then we also have the higher interest rates. Getting a mortgage and being able to get on the property ladder is great. But for many the interest rates are so low as to be affordable by a very thin margin. When the UK central bank inevitably raises its key rate it will push up the cost of these loans, and then, if the debtors can't remortgage they will be struggling. In the words of John Lennon, "All we are saying..." is be very careful before taking out such a high loan to value mortgage at such an economically uncertain time, it may be far better to rent for a while and save until prices are back on an up-cycle.

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