Supersize doesn't fit all

Borrowing more than your home is worth looks tempting, but the risks can be huge, warns Stephen Pritchard

For a home buyer, taking out a very large loan is risky at the best of times. In the current market, where property prices are no longer rising, it can be fraught with danger. In particular, mortgages that allow buyers to borrow more than their home is worth can cause real problems. If prices fail to rise, these buyer s can find themselves trapped in negative equity.

For a home buyer, taking out a very large loan is risky at the best of times. In the current market, where property prices are no longer rising, it can be fraught with danger. In particular, mortgages that allow buyers to borrow more than their home is worth can cause real problems. If prices fail to rise, these buyer s can find themselves trapped in negative equity.

Lender Mortgage Express, which is part of Bradford & Bingley, is the latest bank to offer home loans for more than the value of a property. In fact the Mortgage Express loan goes further than most other lenders by letting borrowers take out a 130 per cent mortgage. Most lenders restrict mortgages to between 90 and 95 per cent of a home's value.

Mortgage Express argues that the loan is especially helpful for first-time buyers who would otherwise struggle to gain a foot on the property ladder. Funding a property purchase is a struggle for this group: a report published last month by The Halifax showed that nine out of 10 UK towns were unaffordable for first-time buyers. However, consumer groups and mortgage experts urge buyers to approach such large loans with caution.

"We do have concerns about this type of mortgage lending," says Moira Haynes, a spokeswoman for the National Association of Citizens Advice Bureaux. "Our experience from the boom of the late 80s and the consequences in negative equity and repossession suggest to us that this is risky, especially at a time when house prices are static and even falling."

A number of other lenders also offer mortgages with higher than usual loan to value ratios: Northern Rock, for example, will lend up to 125 per cent of a property's value with its Together mortgage. But mortgage industry insiders warn that now is not the time to take out such a loan.

According to David Hollingworth, a director at brokers London & Country, mortgages offering 100 per cent of a property's value, or even more, have stood some buyers in good stead during the property boom of the last few years. Borrowers who made the leap and took out a large loan will have seen their homes increase in value, quite possibly to the point where they have built up equity.

That equity may well be sufficient for borrowers to move to a cheaper mortgage, and they will certainly be better off than they would have been paying two or three years' rent. But with a growing consensus that house prices will grow in single figures this year, if they grow at all, it will take today's borrower a very long time to build up enough equity to cover a 125 per cent or 130 per cent mortgage. Mr Hollingworth says that there are some circumstances where taking out a mortgage with a large loan to value is justified. A first-time buyer could add legal and survey costs, or even refurbishing costs to the mortgage.

Very large mortgages, however, come at a cost. Mortgage Express charges 6.49 per cent for a two-year fixed rate, against market-leading rates of under 5 per cent for conventional loans. A two-year discount mortgage with Mortgage Express under the scheme currently costs 6.24 per cent. The high mortgage rate is charged on the entire loan, so potentially the mortgage could work out more expensive than arranging a cheaper mortgage for 90 or even 100 per cent of the property's value and borrowing elsewhere, perhaps from relatives, to cover additional costs. If a borrower wants to switch mortgages, and has not built up enough equity the shortfall will have to be made up in cash.

For homebuyers who want to consolidate other debts, mortgages with high loan to value ratios are one way of unlocking equity in a property. Someone switching debt from an overdraft with a rate of 14.8 per cent, for example, would save just over £83 a year for every £1,000 of debt. But remortgaging to a deal such as that from Mortgage Express will not work for everyone. The borrower must still be able to support the mortgage from his or her salary. The loan has relatively conservative salary multiples of 3.75 times a single salary, or 2.75 times a joint income. This means that the loan will work best for someone consolidating debt who has a high salary but a relatively inexpensive property.

Nor is consolidating debt a panacea. Mortgage interest rates are low, but the debt is paid off over 25 years so the total interest charged can be higher than for a personal loan. And converting debt into secured borrowing, such as a mortgage, puts the property at risk if the borrower defaults. "We would urge caution about converting unsecured borrowing into secured borrowing, and advise against consolidation without taking independent advice first," says the CAB's Ms Haynes.