125% Mortgages

One hundred and twenty-five percent mortgages, or 125 % mortgages, allow you to borrow up to twenty-five percent more than the property's selling value. These deals were quickly withdrawn towards the end of 2007 due to a downturn in the UK economy (see Credit Crunch) which meant that lenders were no longer able to finance this type of mortgage. These mortgages gave you the opportunity of borrowing more than you needed to fund the purchase of the property. As a result, you had spare cash left over to pay the additional costs of purchasing a property, such as legal fees and stamp duty land tax, or perhaps the redecoration of your home. Essentially, this mortgage removed the need to take out a separate personal loan.

125 % mortgages are typically ninety to ninety-five percent secured loan, and the rest will usually be an unsecured loan. Although they were called 125 % mortgages, this was a maximum percentage and in reality relatively few people were offered the full amount.

The interest rates on 125 % mortgages are usually very high, which means that you will often find a cheaper mortgage elsewhere. To protect yourself from increasing interest rates, you may wish to opt for a fixed or capped interest rate, which will ensure that your monthly repayment is not subject to sudden increases.

Since you are borrowing a large amount in comparison to the property's selling price, you are normally charged a greater Higher Lending Charge (HLC). Rather than having to pay this fee immediately, it is often added to the amount borrowed. This means that you are also charged interest on the fee, which increases the overall cost of your mortgage.

The withdrawal of this type of mortgage has led to an increasing number of first-time buyers opting for guaranteed mortgages, especially graduates, who finish studying with a large amount of student debt and cannot afford to save for a deposit on a property. A guaranteed mortgage allows your parent or other family member to provide the lender with additional security in the event that you are unable to make repayments. This means that you are more likely to be accepted for a mortgage because the lender is able to recoup their money from your guarantor, in the event that you are no longer able to make repayments.


Negative Equity

Negative equity describes the situation where the amount you owe on your mortgage is higher than the value of your property. This is a problem which particularly affects 125 % mortgages because the amount you secure on the property (the secured part of the loan amount) is close to the initial value of the property. This means that if your property's value decreases (even a little), you could owe more on your secured mortgage than your house is worth. If you cannot meet your repayments and are forced to sell your house, the sale may not fully cover the amount you owe and your debt would not be repaid.