Watch the 125% mortgage trap
James Coney, Daily Mail
17 November 2006

First-time buyers taking huge mortgages that are larger than the value of their home could wait five years before they break even.

And if house prices do not continue to rise at their current rate buyers risk being trapped in their home by negative equity for years.

The warnings come after the UK's biggest mortgage lender Halifax/Bank of Scotland launched a mortgage last week through subsidiary Birmingham Midshires, giving buyers the chance to borrow a quarter more than the cost of their home. Northern Rock and Coventry BS already offer similar 125% mortgages.

These mortgages are more complicated than they might first seem. Homeowners actually take a 95% loan secured on their home and a further unsecured loan equivalent to 30% of the property price. This allows them to wrap up other debts and pay for all the added costs of moving in to a first home.

But there is a limit on the size of the unsecured loan: Northern Rock will lend up to £30,000 on it; Coventry BS up to £25,000, but your mortgage rate will increase the more you want to borrow.

So someone paying the average first-time property price of £138,000 could borrow £161,000. Of this £131,000 would be on the normal mortgage and £30,000 on the top-up loan.

But if prices grew by a conservative 4% a year, then only at the end of the fourth year would their home be worth more than their mortgage. And there are other dangers, especially if you want to re-mortgage to a new lender and house prices have not increased enough to swallow up your top-up loan.

In this case the rate on the Northern Rock loan will rise to a whopping 14.84%. Coventry will add 5% to whatever mortgage rate you had - giving a minimum rate of 10.79%.

Mortgage experts warn that any first-time buyers banking on a repeat of the soaring house price growth of recent years taking them out of negative equity (where the value of their home loan is greater than the price of their house) could be playing a dangerous game.

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