125% mortgages have finally been scrapped by High Street lenders amidst across the board controversy just as the bubble seems to have burst on the housing market.
It seems that Northern Rock’s flagship mortgage deal which offered low income families the ability to get onto the housing market, has partly been the company’s undoing.
As house prices are starting to fall dramatically, these 125% mortgages are leaving borrowers with negative equity in their property.
Not only are these mortgages suddenly priced above the property’s market value but have also left the borrower open to extortionately high interest rates and the likelihood of wages being stretched, beyond being able to keep up with mortgage repayments.
This may mean it will be difficult for borrowers to remortgage and so may be subject to financial loss. However, it will not just be borrowers who will be faced with losses as lenders will find that they will have difficultly in keeping interest rates low in other products.
This, coupled with Northern Rock being nationalised in emergency measures, means there is less money in the housing market making it difficult for lenders to lend elsewhere for risk of further mortgage defaults.
125% mortgages were seen as a radical new idea, so much so that lenders such as Northern Rock were prepared to ignore the possible financial risk involved with them and targeted people who needed the most help in getting on to the property ladder.
Ten years ago this seemed a welcoming, helpful product, but in retrospect it cannot be long before the blame for the nationwide mortgage crisis is firmly shifted from naïve borrowers onto the sales hungry mortgage lenders’ shoulders.
Criticism for these mortgage schemes has been around for some time; in fact bodies such as the Financial Mail and Liberal Democrat Lord Newby have suggested these mortgage deals are simple not financially stable enough for them to be mass marketed or suitable for first time buyers.
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