The return of the 125% mortgage deal

Nationwide has started offering 125% mortgages again. But is this really the irresponsible move it appears to be? John Fitzsimons investigates.

As the credit crunch, and subsequent recession, has unfolded, high loan-to-value lending has consistently been blamed - at least in part - for the problems we all now face.

People were allowed to take out mortgages that were, quite obviously, far too big for them. Mortgages that were worth, for example, 100% or the value of their property - or even more: 125%, placing the borrower immediately in negative equity.

Effectively, the borrower and the lender were taking a gamble on house prices rising, and rising, and rising, until the borrower had enough equity to remortgage to a more 'normal' deal at say 95% or 90%.

Soon after the crash began, lenders withdrew their 100% and 125% deals from the market. Today, even a 95% mortgage is hard to come by, and you're  forced to pay higher rates on a 90% mortgage than on, say, a 75% deal. So first-time buyers, for instance, are forced to wait until they have saved (or been given) a large deposit before they can afford to take their first step onto the property ladder.

All well and good, you may be thinking. Good riddance to bad lending and irresponsible lenders!

In the light of all this, Nationwide's move today to reintroduce 125% loan-to-value mortgages seems highly irresponsible.

Yet, in my view, it's fantastic.

Here's why.

That disappearing equity

Firstly, it is only open to existing Nationwide customers who are in negative equity. Not to new borrowers. Not to first-time buyers. To borrowers who already, effectively, have a 125% mortgage - but are languishing on either their Nationwide existing deal or the lender's Standard Variable Rate.

The original decision to lend to these people has already been made - and there's no going back on it for either the lender or the borrower. 

Now, negative equity should not be viewed as the end of the world, but it does trap you in your property.

Say, you want to sell up and buy a new home. If you are in negative equity, you would have to come up with a deposit for the new property, in addition to paying off the equity shortfall on your existing home, while the absence of 100% remortgage products means that again, you would need to fork out a hefty sum as a deposit.

However, what is so fantastic about this new mortgage from Nationwide is that it is designed to help homeowners in exactly that spot, as it allows them to 'carry over' the negative equity to the new property.

So if you absolutely have to move house, perhaps for work, or because your family is growing, but are stuck in negative equity, then this deal could provide a lifeline.

How it works

The mortgage is structured in a similar way to the 125% mortgages that were available a couple of years ago.

Customers will actually take out a mortgage for just 95% loan-to-value of the value on the new home at a fixed rate for between three and five years. They can then add on the negative equity from the old property, up to 30%, at a slightly higher rate of interest.

This is not a million miles away from the Together range, offered by Northern Rock, which consisted of a 95% mortgage and a 30% unsecured loan.

However, the important distinction is that this is not open to new borrowers, as the Together range was, but rather a select band of existing borrowers.

The large falls in house prices over the last 18 months have left one in 10 homeowners trapped in negative equity, according to the Bank of England.  

Anything that can be done to help them, should they want or need to move on, deserves praise, so in my view, this is a very classy move, from a very classy lender. In fact, you could argue it is a highly responsible move, because lenders have a responsibility to look after their existing customers.

I only hope more lenders follow suit.

The 'evils' of high loan-to-value mortgages

Inevitably, the fact that Nationwide has done this now will lead to much hand-wringing among certain sections of the press about the 'irresponsible' lending practices of the banks that got us into this mess.

And I agree that some people were given mortgages they should not have been. Indeed it would be folly to try to argue against that.

However, that does not mean that high loan-to-value lending is automatically irresponsible. There is nothing wrong with lending at 90% or 95%, or even 100% or 125% so long as the customer can afford the repayments and understands their responsibilities, and indeed the risk of negative equity.

It also relies on the banks to be more stringent in just who they give these mortgages to, rather than every Tom, Dick and Harry who wants one. For the right borrower - those in it for the long term, who are in a position to make regular overpayments or escalate their payments if need be - these products are a great option.

But the essential thing is that borrowers enter such a deal with their eyes wide open, fully aware that they are taking something of a risk.

Undoubtedly lenders need to be more responsible in their lending practices, but that does not mean high loan-to-value mortgages should be completely written off as irresponsible.

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