Death of the 100 per cent plus mortgages

With the news last week that the 3 main mortgage providers have pulled the plug on their 100% mortgage products should we be worried about the implications of this on first time buyers?

The Alliance and Leicester, Abbey and Coventry Building Society have all stopped offering mortgages deal which included an unsecured loan. Many first time buyers jumped at the chance of these deal as they did not have save up for a deposit and have a debt consolidation loan in one package. However, the banks were criticised for this as it was seen as encouraging people to take on more debt which they couldn't afford without offering debt advice.

So should we mourn the loss of the 100% mortgages? No. These mortgages were the equivalent of a get rich quick scheme where the highly competitive banks, wanting to cash in on the property boom, could not see beyond the next couple of years and sold as many mortgages as possible. This short termism meant that the banks did not care whether or not the borrower could make the mortgage repayments after the discount period had finished. High confidence and cheap interest rates on the international wholesale money market over the last 5 or so years meant that another discounted mortgage would be available from another bank should the borrower fail to remain with their current mortgage provider. Couple to this high house price inflation meant that last year's 125% mortgage would be next year's 85% mortgage. So why save for a deposit?

In essence the banks were encouraging an irresponsible attitude to money and borrowing, which lead to a "buy now think later" attitude. Buying a house, unless you are Roman Abramovich, is the most expensive purchase you'll make. That it is why you must be in the best financial position you can be before the purchase. Factor in the salary to mortgage multiples and it's easy to see that unless you are in control of your spending you'll end up borrowing more to remain in your house, borrowing money from who? The mortgage companies were just ignore the main fact that what those people needed was good debt advice and a well thought out strategy for debt management not more debt.

In the past those who wanted to get on the property ladder would save for the deposit. This would mean that their finances would be in a stable position ready for the responsibility of paying a mortgage. The loss of the 100% plus mortgages will, hopefully focus attention that being in control of household budgets is more than house inflation.

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