125% mortgages - not quite what they seem

David Knight, Mortgage analyst at Moneyfacts.co.uk comments: “Despite the continuing tightening of criteria in the mortgage market, especially on riskier loans, five lenders are still offering the much talked about 125% loans.

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

“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 products. On the lower rate 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 fall, or at the very least 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.”