Lenders pull deposit-free mortgages

19 February 2008

Five top mortgage lenders are to stop selling deposit-free mortgages as concern about the housing market deepens.

Deposit-free mortgages allow buyers to borrow up to 125% of the value of their home, and have been very popular over the past few years among first-time buyers hoping house price inflation will enable them to pay off their loans.

However, Alliance & Leicester, Northern Rock, Coventry Building Society and BM Solutions (part of the Halifax group) have all announced they will pull their 125% products by the end of this week. And Abbey says it will also stop offering its 125% mortgage, which it has been piloting since last September.

These types of mortgages, commonly known as 100%-plus products, combine a traditional mortgage with an unsecured loan to allow buyers to borrow additional funds to cover costs such as stamp duty, moving and furniture.

But they are controversial because they effectively leave buyers in negative equity from day one.

Negative equity

The concern now is that borrowers whose 100%-plus products are coming to the end of their discount period could find themselves unable to remortgage onto another deal.

If 100%-plus borrowers are unable to remortgage then they will have to move onto standard variable rates and see their monthly repayments increase. There is a risk that many may be forced to sell their property, potentially at a loss, or face repossession.

For those who have reduced their mortgage down from 125%, Scottish Widows is still offering a 110% product for professionals while Bradford & Bingley has a 110% mortgage through its Mortgage Express brand.

Bradford & Bingley says it it reviewing whether to continue offering these high loan-to-value products. Scottish Widows says it has no plans to reveiw its product.

A spokeswoman for Alliance & Leicester says the slowdown in the housing market is the main reason why it has decided to scrap its 125% product. With house prices predicted to, at best, remain static or, at worst, fall in 2008, the fear is people with 100%-plus products will not see their property increase in value this year.

Both Coventry and Abbey say a lack of consumer demand is the key reason why they have decided to ditch their 125% offerings.

A spokeswoman for Abbey said: “At this time people should save for a deposit before they buy.”

It is not known how many people have 100%-plus products in the UK and how many of them are currently coming to the end of their discount periods. Coventry says 100%-plus loans make up around 8% of its total mortgage book, equating to around 8,000 mortgages.

Ray Boulger, from mortgage brokerage John Charcol, said first-time buyers have been shying away from 100%-plus products for some time because of fears that house prices will either fall or remain flat in 2008.

Watch a recent episode of Moneywise TV and hear from first-time buyers who borrowed more than the value of their property and are concerned about negative equity.

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