Three lenders scrap 125% mortgage deals as criticism increases

Three lenders scrap 125% mortgage deals as criticism increases

Three mortgage lenders yesterday pulled the plug on deals that allow home buyers to borrow as much as 125% of a property's value - the day after Northern Rock came under fire for offering similar deals.

It is the latest evidence that banks and building societies are tightening their lending rules in response to the credit crunch and the housing market slowdown.

Alliance & Leicester and Coventry Building Society announced within hours of each other that they were withdrawing their 125% mortgage products. Meanwhile, Abbey said a pilot scheme to test 100%-plus mortgages launched last autumn would end on Friday.

The moves appear to be linked to the nationalisation of Northern Rock, which has sold more of these controversial mortgages than any other lender. Over the past few years, home loans that let people borrow more than the value of the property have proved particularly popular with first-time buyers, as they allow them to get on the housing ladder without a deposit. But they have frequently been cited by debt charities as an example of irresponsible lending.

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The deals typically work by allowing people to borrow up to 95% of the property's value as a traditional secured mortgage, and up to an additional 30% as an unsecured personal loan. Home buyers taking out such deals now are particularly vulnerable to house price falls, because they have no equity to cushion them against a drop in the value of their home.

There is growing speculation that Northern Rock's new management will call a halt to sales of 125% mortgages on the grounds that it is inappropriate for a state-owned bank to encourage people to take on unsustainable debts.

The Newcastle-based bank is still selling these mortgages, but at uncompetitive rates which seem to be designed to ensure they have very few takers.

Melanie Bien, a director at mortgage broker Savills Private Finance, said: "The death knell for 125% loan-to-value (LTV) mortgage products was sounded when the government nationalised Northern Rock. How can the government be seen to encourage borrowers to take on such high LTVs, particularly when house price growth is slowing and prices are falling in some areas?"

She added that there was risk enough associated with taking on a loan that was more than 100% of the property purchase price when prices were rising, "never mind when they are falling and the risk of negative equity is so much greater".

Alliance & Leicester said it was withdrawing its PlusMortgage products due to "current market conditions", while the Coventry said applications for its product, called MOREgage, "have reduced to a negligible level, and it is no longer cost-effective to maintain the additional underwriting processes for these higher loan-to-value loans". Abbey last year began testing the 100% Plus Mortgage, but said this pilot would end on Friday, adding that the bank would probably not be rolling out the product any time soon.

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