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125% mortgages - not quite what they seem

Despite the continuing tightening of lending criteria in the mortgage market, especially on riskier loans, five mortgage lenders are still offering the much talked about 125% mortgages.

However 125% loan to values may not be quite what they seem. Mortgage lenders have put such tight restrictions on them that only in very specific circumstances can a mortgage borrower will get the full 125% loan.

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For example Abbey,Alliance and Leicester and Coventry will restrict the extra loan, secured or unsecured to a maximum of £25K. Effectively this means that the property can only be worth a maximum of £100K to achieve a 125% loan.

This week Northern Rock placed further restrictions to some of its Together range mortgage products. On the lower rate mortgage deals, the unsecured loan is limited to a maximum of 30% or £10K. In these circumstances, the property would have to be worth a maximum of £33K in order for the borrower to get the full 125%. A 30% or £30K loan is still available but at a 0.20% higher rate.

At a time when the housing market is showing signs of a slowdown, it is especially important that borrowers take full consideration of what borrowing more than the current value of their property could mean for them in the future.

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