Does anyone really need a 100% mortgage?

Negative equity

With the housing market still on an overall downward trend the last thing the bewildered public needs is a concerted marketing drive for 100 per cent mortgages.

From the lenders' point of view, these loans - which offer borrowers the full value of their intended purchase - might seem an obvious way of kick-starting the market.

But with the latest house price index from Halifax Building Society showing prices down by an average 1.5 per cent across the country in the past year, borrowers who take on 100 per cent loans are in danger of placing themselves immediately into negative equity, where their property is worth less than their mortgage.

Over the past few weeks some lenders, led by Abbey National, have made strong cases for 100 per cent lending even though they withdrew these schemes to everyone in mid-1991. But not all lenders agree that the tactic is a sensible one, warning that it could undermine what has been a steady easing of the national negative equity burden.

Figures published today by UBS, the investment bank, show that the number of households with negative equity fell by 100,000 to 1.2 million in the first quarter of 1995, having finished 1994 unchanged at 1.3 million. There are now 600,000 fewer homes afflicted by negative equity compared with a peak of 1.8 million in the first quarter of 1993. The average equity shortfall faced by affected households also decreased, from £5,000 in the last quarter of 1994 to £4,700.

The fall in the overall negative equity burden - from £12bn in the first quarter of 1993 to £5.5bn in the first quarter of 1995 - reflects wide regional variations in house price trends, a point seized on by Abbey National.

The bank challenges Halifax Building Society's house price index. A spokeswoman, Annette Wrigley, said: "There is not a general picture of house prices going down everywhere at the moment." The Halifax regional breakdown shows price rises of 0.8 per cent in Greater London, 1.6 per cent in the South- east and an impressive 7 per cent in Northern Ireland over the past 12 months.

Ms Wrigley said: "We have been offering 100 per cent loans to borrowers on a discretionary basis for some time but decided to formalise the arrangement after hearing that there was demand from borrowers."

The Abbey National scheme, which is available only on its standard variable rate of 8.34 per cent, offers 100 per cent of the purchase price to borrowers with a very clean repayment record and is not offered to first-time buyers. Ms Wrigley said: "I think this is the case with most lenders; they want to see evidence of the ability to make regular payment before giving people these loans."

Yorkshire Building Society, which also offers a 100 per cent scheme to existing borrowers, is keen to stress the social factors that may lead a borrower to leave his or her existing home.

David Holmes, a spokesman for Yorkshire, said: "There are a lot of good borrowers who may be in a position where they have to move and have no existing equity. They may be having a larger family or be offered a better- paid job in another part of the country." The Yorkshire scheme is offered at a 0.25 per cent premium for 8.44 per cent.

But Portman Building Society says that most borrowers should still save for the usual 5 per cent deposit on their homes. A Portman spokesman, John Gully, said: "I think there is a great danger of people falling immediately into negative equity by taking out these schemes."

And the UK's biggest lender, Halifax, agrees. A spokeswoman said: "We have no plans to offer 100 per cent lending other than on a discretionary basis."

Halifax does offer a negative equity scheme for borrowers who want to move, which offers 10 per cent of the new house price combined with up to £25,000 of existing debt.

John Charcol, the national mortgage broker, often recommends 100 per cent loans to clients who have the right circumstances.

John Charcol's marketing director, Ian Darby, said: "I think we will always be prepared to recommend 100 per cent loans for clients who have a good repayment record and, clearly, will have no problems in meeting their monthly mortgage repayments."