Nationwide today defended the launch of its 125 per cent mortgage saying the loan offered a "socially responsible and prudent" solution to people in negative equity.
The group said the "very niche" product was only available to existing borrowers who needed to move home, but who owed more on their mortgage than their property was worth.
Under the terms of the deal, customers in this situation will be able to borrow up to 95 per cent of the value of their new home, with them still needing to put down a 5 per cent deposit.
They will then be able to transfer the negative equity on their former home to the new property, as long as it does not exceed 30 per cent of the new home's value.
Borrowers will be offered a three-year fixed rate mortgage at 6.73 per cent or a five-year one at 7.48 per cent on the 95 per cent portion of the mortgage.
Interest charged on the negative equity part of the borrowing rises to 7.23 per cent and 7.98 per cent respectively.
A Nationwide spokesman said: "You cannot borrow more than 125 per cent of the property's value.
"The risk to us cannot be greater than it was on the previous property, because the borrower has put in some money, there is no greater exposure for us.
"We are doing something socially responsible and prudent."
He added that the group had received only a handful of inquiries about the product since it was launched in June.
Mortgages that enabled people to borrow more than their home was worth have come in for heavy criticism since the housing downturn started, with Northern Rock's former Together Mortgage, which lent 125 per cent of a property's value, now infamous.
But mortgage brokers welcomed the move by Nationwide and called on other lenders to follow suit and offer solutions to people in negative equity.
Louise Cuming, head of mortgages at moneysupermarket.com, said: "At a time when overly restrictive and cautious lending practices are holding the housing market back, Nationwide's flexible approach is to be welcomed.
"As Nationwide already has a relationship with these customers and visibility of their payment history, they can ensure that they are extending these loans responsibly.
"The truth of the matter is if the customer is in negative equity they already have a mortgage of greater than 100 per cent before Nationwide enables the customer to move house."
She said that while she was aware that some lenders had been offering similar deals "under the counter", Nationwide was the first to promote it, and this may force others to follow suit.
Andrew Hagger, of Moneynet.co.uk, said: "Many people will have become negative equity victims through no fault of their own, and it is a positive move from the Nationwide, who are quite rightly focusing on affordability criteria rather than applying an inflexible and restrictive LTV policy.
"These are far from normal times in the housing market and it is a positive move from the UK's biggest mutual recognising the needs of their customers and coming up with a sensible niche solution.
"Let's see if other lenders follow up with similar tailored solutions to assist customers with a proven repayment history and in the same predicament."
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