90% Mortgages, exactly as the term suggests, are mortgages which cover 90% of the value of a property. For example, if you are purchasing a property for 100,000 a 90% mortgage would be for 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 can’t you just get a mortgage to cover the full value of your property? Why do you have to put down a deposit to buy a property?
You must consider the importance of ‘equity’ to both parties; the borrower and the mortgage lender. The difference between the value of a property and the amount of borrowing secured against the property is known as the ‘equity’ or ‘equity margin’. It is the prospective financial value sitting within your property, which can be realised if you were to sell the property.
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 is negative equity a problem? Well, a negative equity situation poses a risk for both the lender and the borrower. The lender always holds a legal charge over your property when they offer you a mortgage. In the event that you default on your mortgage payments, the lender then has the legal right to repossess your property and sell it in order to recover the debt. If the property is worth less than the debt (mortgage) – then they will not be able to recover the full debt and will suffer a loss. It is ‘equity’ in a property which protects lenders against the risk of lending.
A negative equity situation poses problems for borrower, who may find themselves a prisoner in their own home. If you wanted to sell your property in a negative equity situation, you would have to produce the additional funds required to pay off your mortgage on sale, before your mortgage lender will agree to release their charge. If you wish to stay in your property, you will be unlikely to remortgage until you have regained an equity margin in your property, and if interest rates increase this may cause a problem for your financial position.
So equity is important to borrowers and lenders, and hence you can see why in this post credit crunch era, mortgage lenders have shied away from high loan to value mortgages causing them to fall into decline. Before the credit crunch hit, there were literally hundreds of 90% mortgage products available to UK borrowers. House prices were rising, and had been for a number of years. It seemed unlikely that negative equity would pose much of a problem, and in fact most borrowers were seeing an increase in the equity of their property month on month. Since the bite of the credit crunch, however, and the resulting squeeze on available funds for mortgage lenders, most lenders have been reluctant to offer high loan to value mortgages.
90% mortgage approvals fell from 245,000 in 2006 to just 28,000 in 2009. As we move into 2011, there are continuing concerns about a stagnated or declining housing market with significant house price falls expected in some areas of the UK. UK mortgage lenders who have already shown to be reluctant to lend money on higher loan to value mortgages over the last 24 months are set to tighten their criteria for 90% mortgages even further in the short term. It is no longer possible to obtain mortgages at 95% or 100%, so 90% mortgages have become in a sense the highest risk type of mortgage available. Should house prices fall by more than 10% over the next 24 months, then anyone taking out a 90% mortgage now will fall into negative equity.
In the future, I am sure 90% Mortgages will return to greater availability, but this may not happen for quite some time. And until it does happen, the housing market is likely to remain in a state of stagnation and decline, with few first time buyers feeding into the system. It seems that for this generation anyway that 90% mortgages have had there hay day…
If you are looking for further information, take a look at this Squidoo Lens : 90% Mortgages or this Go Article : 90% LTV Mortgages
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