House Price Falls May Lead To Problems

It is now possible for you to borrow 125% of the value of the property you are buying. The idea of 125% mortgage may appear attractive to potential borrowers. House bought, all extra fees paid for, no deposit needed, and all that cash!

For first-time buyers a 125% mortgage could make the difference between buying a property and being unable to do so. In addition they can pay the stamp duty, solicitor’s fees and still have enough money for furniture.

Those people already on the property ladder can change lenders and take advantage of this mortgage in exactly the same way.

Indeed you don’t even have to move house. If you want to consolidate debts (credit card bills, bank loans, finance), or use the money to build an extension, buy a new car or even help a child with their deposit for their first purchase, you can do it via a 125% mortgage.

The way these loans work varies, but the loan is often made up of a secured part (95-100%), and an unsecured part (25-30%), but with the same interest rate applicable across all the borrowed money – which would be a lower rate than on a regular unsecured personal loan.

The main problems are that the interest rate is usually higher than on regular mortgages, and you will be borrowing more than the value of the property. This puts you into negative equity (the value of your house being less than the outstanding mortgage) straight away. Most people would wish to avoid getting anywhere near negative equity.

The possibility of negative equity returning to haunt Britain’s mortgagees has been in the news recently as house prices have shown signs of falling. Negative was last a real problem for British families in the early 1990s. The main problem is that people can’t move because they will have to actually find money to sell their property, let alone buy a new one.

The continuing rise of house prices has helped avoid the equity trap, in spite of rising interest rates over the last year, and all costs associated with moving going up. However, recent surveys have shown that house prices are beginning to fall on a monthly basis, and although annual house price inflation is still positive, industry experts expect it to stagnate or even go into reverse in 2008.

For people who take out a 100% or a 125% mortgage this could mean potential problems. An estimated 33,000 first-time buyers have borrowed the full value or more of their property to the end of August 2007. The Mortgage Advice Bureau says that the number of people taking out 100% mortgages has more than doubled in the first nine months of the year compared to the same period in 2006.

Both the Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling have told the banks and building societies to lend more responsibly, but mortgage providers continue to offer 100% mortgages and above.

Many products have been withdrawn by lenders that were available to higher risk customers, but first-time buyers with stable jobs are still being offered these mortgages.