Abbey's 125% mortgage Comes Under Fire

The Abbey has come under fire recently for launching a new product for 125% mortgages. The accusations were that the bank is contributing to eh country’s growing debt problem with such a loan.

The main problem with 125% mortgages is that is gives the borrower instant negative equity. This is the circumstance where the value of the house is worth less than the value of the mortgage. It became more prevalent in the housing price crash of the early 1990s – and was never considered a good thing.

The loan from the Abbey is the largest of its type ever offered to UK house buyers. It is entirely secured on the property, which could mean that if a borrower missed any sort of payment – even on the portion of the loan above the property’s value (the 25%) – they could lose their home to repossession by the bank.

The Abbey has been accused of failing to learn the lessons of the recent problems at Northern Rock and calls by the government and the Bank of England Governor Mervyn King for a return to responsible lending. The timing of the announcement of the 125% mortgage scheme, at least, seems poor.

Currently the 125% mortgage on offer from the Abbey is a pilot scheme being offered to first-time buyers and some other groups. Industry experts are not impressed by the mortgage at this time. With instant negative equity, borrowers would be opening themselves up to even bigger problems if house prices should fall – and there is growing evidence that that is beginning to happen. Negative equity would grow even bigger, and some buyers might find themselves an additional statistic on a repossessions list.

Northern Rock’s current plight has served to highlight how lending can get out of hand, so 125% mortgages would be unlikely to find favour just now. Anyone tempted into taking out a 125% mortgages would have to be very confident that they would stay in the property for a very long time – until house prices pick up again and they are free of negative equity – or that their income is about to rocket so that the repayments are suddenly dwarfed by their salary. In general terms, though, it is not likely to work for many at the moment.

The 125% mortgage from Abbey enable a homebuyer to borrow 100% of the value of the property, plus £25,000, so a first-time buyer looking at a £100,000 house would be able to borrow £125,000 – a mortgage of 125%. Even a loan of £225,000 against a £200,000 property is a mortgage of 112.5%. Loans of less than £100,000 are calculated on a pro-rate basis.

Northern Rock, indeed, had a 125% mortgage on offer. The difference was that the 25% of the loan above the property’s value was not secured against the property, and therefore missing a payment on that part of the loan did not put the owner’s property at risk.

Abbey said that its 125% mortgages would be useful to house buyers who wished to use extra cash to furnish or refurbish a property. The bank also said it carried out finance checks on all customers to ensure they can afford the loan repayments.

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