New mortgages for borrowers in negative equity

Halifax and Bank of Scotland are offering new mortgage deals to existing customers who have no equity in their homes – in a clear break from the trend of lenders demanding large deposits.

The lenders, part of Lloyds Banking Group, are discreetly extending the maximum loan-to-value (LTV) on some of their new mortgage deals to customers who are coming to the end of cheap fixed or tracker rates.

This means borrowers who have no equity – or even owe more than the value of their home – are qualifying for loans aimed at customers with deposits of at least 5 per cent. The lending policy contrasts with that of other banks, some of which will only offer new deals to existing customers with at least 25 per cent equity.

Mortgages that allow homeowners to borrow 100 per cent of the value of their homes have disappeared from the market as falling house prices increased the threat of a prolonged period of negative equity.

But a spokeswoman at Halifax said it was important to offer a range of options for customers coming off existing deals, even if their equity had been wiped out. Borrowers who are not offered a new deal when their existing one expires have to revert to their lender’s standard variable rate (SVR). While these are low at present – Halifax charges 3.5 per cent, for example – there is a risk that if interest rates rise sharply, borrowers may be stuck with unaffordable mortgage payments.

Halifax has a five-year fixed rate of 5.29 per cent, which is advertised to customers needing a loan-to-value of up to 95 per cent.

But the spokeswoman confirmed that this rate could be made available for
existing customers in negative equity, although this was not “a hard and fast rule”. Customers who want to extend their mortgage above 95 per cent to move home, for example, would not qualify.

Mortgage brokers said it could be worth borrowers locking into a new fixed rate even if they were paying Halifax’s cheaper SVR.

“Borrowers with no equity won’t be remotely close to getting that rate from any other lender,” said Ray Boulger, senior technical manager at John Charcol. “If interest rates go up relatively quickly, customers who stay on the SVR will be at a greater risk of not being able to afford their repayments.”

Lenders are bringing out a greater range of deals for borrowers who still have 10-15 per cent of equity.