Wed, 20 February 2008

Thousands of borrowers on 125 per cent mortgage deals will be forced to pay hundreds of pounds more in monthly repayment bills after most of the lenders offering these loans withdrew from the market yesterday.

The fallout from the credit crunch and stalling house prices have forced four leading lenders to stop offering 125 per cent mortgage deals. Another lender said that its deals were under review, which could leave Northern Rock as the only lender still offering this type of loan.

These 125 per cent deals were popular with borrowers, especially first-time buyers, when house prices were rising. The mortgages offer up to 95 per cent of the value of a home as a traditional mortgage, plus another 30 per cent as an unsecured personal loan, capped at £25,000 or £30,000.

Yet there are fears that some home-owners will be unable to find a similar offering when their current deal ends, leaving them facing much higher repayments. A borrower coming to the end of a fixed-term deal will be forced to renegotiate the “mortgage” portion of the loan with their current lender or a rival. The best-buy two-year fix for a 95 per cent mortgage is about 5 per cent, but borrowers with 125 per cent deals may be prevented from obtaining such a competitive deal by the fact that they also have a large unsecured loan.

Melanie Bien, of Savills Private Finance, a mortgage broker, said: “In the current climate, lenders are really looking at affordability, so having a big unsecured loan with another lender may scupper borrowers’ chances of getting a new competitive deal elsewhere.”

Instead, they may be forced to take any mortgage deal that they can get, which is likely to be more expensive, and pay a punitive rate on the unsecured loan with their current lender.

Northern Rock charges 15.59 per cent on the unsecured portion of the loan for those who come to the end of their two or three year together mortgage deal. A borrower with a £125,000 mortgage with Northern Rock could see repayments rise by nearly £200 a month if they take out a new 95 per cent loan to cover the mortgage but are forced to pay a new, higher, rate on the unsecured debt of £30,000.

Alliance & Leicester said that it would stop selling its 125 per cent Plus-Mortgage home loans today, while Abbey will end its pilot scheme for 125 per cent deals on Friday. Coventry Building Society and Godiva Mortgages will also stop selling the mortgages this week. Birmingham Mid-shires, which is owned by Halifax, said its range of loans was “under review.”

Coventry said that it was planning a “maturity” loan, which would allow borrowers to roll over to a similar deal on more favourable terms, although the rates have yet to be decided.

SOURCE: business.timesonline.co.uk