The 125% risky mortgage

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by Kay Murchie

The 125% mortgage can enable first-time buyers to borrow enough to purchase the home and have enough left over for moving and legal fees, stamp duty and furniture costs.

The facility is made up of a maximum of 95% as a secured loan (a mortgage) and a maximum of 30% of £30,000 (whichever is the lower) as an unsecured loan, but with the same interest rate applied across both parts.

However, David Knight, a mortgage analyst at Moneyfacts.co.uk, has commented on the 125% loan to value and said they might not be quite what they seem.

Lenders have implemented such tight restraints on these mortgages that only in certain circumstances will a borrower receive the full 125% loan.

Following the credit squeeze, there has been a tightening of lending criteria but there are a few lenders who are still offering this loan.

Abbey, Alliance and Leicester and Coventry will limit the extra loan, secured or unsecured to a maximum of £25,000. Effectively this means that the property can only be worth a maximum of £100,000 to achieve a 125% loan.

Mr Knight concluded that the property market is showing indications of a decline so it is particularly vital that borrowers fully consider the implications of a 125% mortgage.

Borrowing more than the current value of their home could have serious consequences for them in the future.