Last 125% mortgage offer is scrapped

The 125 per cent mortgage was rendered extinct yesterday as the final lender withdrew from the market. Birmingham Midshires, owned by the Halifax, became the sixth mortgage lender this week to stop offering loans worth more than the value of a property, amid increasing nervousness from banks and building societies about defaulters and the spectre of negative equity.

The 125 per cent deal, typically structured as a 95 per cent mortgage with a 30 per cent unsecured loan on top, proved popular with first-time buyers. But the credit crunch has raised the cost of lending and mortgage providers are increasingly risk-averse.

Denise Harvey, an analyst with personal finance data provider Moneyfacts, said: "While property prices were increasing, the risk [of lending more than the value of the property] was one lenders were prepared to take. But, following on from the credit crunch and with property prices expected to remain stagnant or decline throughout 2008, these mortgages are no longer on the menu."

Lenders are also increasingly reluctant to offer 100 per cent deals, with Bradford & Bingley and Mortgage Express both withdrawing such products yesterday. All but two providers – Scottish Widows and Dunfermline Building Society – now require borrowers to put down a deposit.

The absence of high loan-to-value mortgages will make it even more difficult for first-timers to get on the housing ladder. It could also hit customers who have taken out such deals recently, usually on a discounted or fixed-rate of interest offered for only the first 12 or 24 months.

Katie Tucker, of the independent brokerage Charcol, said homeowners with large loan-to-value mortgages could be caught out when these short-term rates came up for renewal. "Anyone with existing mortgages in excess of 100 per cent should overpay as much as possible now to reduce their loan-to-value to less than 100 per cent," she said.