First time buyers face an even greater struggle to get on to the property ladder, after 125 per cent mortgages disappeared from the market last night. Northern Rock and Birmingham Midshires were the last two lenders offering 100 per cent-plus home loans, but both decided to withdraw their deals amongst concerns over credit conditions.
These 125 per cent deals were popular with first timers as they allowed them to take out a 95 per cent mortgage alongside a loan usually capped at £30,000. It meant homebuyers could purchase without a deposit and use the remaining money to pay for stamp duty and furnishing.
It looks increasingly likely that all buyers will be forced into saving for a deposit from now on. Twelve lenders have withdrawn their 100 per cent deals in recent months, the most recent being the Bank of Scotland this week. The main cause of this pull out appears to be concerns that many homeowners are at risk of negative equity.
A sudden collapse in the property market could leave many owing more than the value of their home and unable to pay off their loan. Though interest rate drops have eased the situation slightly, the Bank of England has vowed not to follow the example of the United States and announce huge cuts.
“Lenders are pulling the deals because of the prospect of falls in house prices,” said David Hollingworth, of mortgage broker London & Country “The result is the virtual extinction of loans worth more than 100 per cent.
“The outlook for existing borrowers with these deals are poor. I would urge all lenders to ensure they have a plan in place so that their customers do not get trapped paying an expensive Standard Variable Rate.”
Analysts predict that house prices, particularly on the one and two-bedroom new build flats that attract first-time buyers, could plummet over coming months. Borrowers who currently have a 125 per cent deal may well face huge rises in repayments, and struggle to get a mortgage when they come to the end of their deal.
Though several lenders have promised ‘roll-over’ packages for borrowers coming off these deals, there has no indication of how generous their rates will be. Borrowers who switch to rival lenders will have to pay punitive rates on the remaining unsecured loan, with Coventry and Alliance & Leicester both charging around 12 per cent on the outstanding balance.
Those who stay loyal to their provider may also pay increased rates, and a homeowner with a £100,000 loan will have to pay an extra £112 a month on Northern Rock’s 7.84 per cent Standard Variable Rate.
“With house prices set to remain flat at best, borrowers with these products should certainly plan toward the end of their deal as there could be few alternatives for refinancing,” added Mr Hollingworth. “Overpaying makes sense and I would hope that lenders will make some type of continuation product available.”
There is no need for homebuyers on 125 per cent deals to panic, although most experts advise swift action. Lenders appear to be increasingly reluctant to offer high risk loans, so securing a good deal may well be easier now than in a couple of months.
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