125% Mortgages

Not very long ago, obtaining a 100% mortgage was tricky. What's more, the fees were punitive. So you may be surprised to learn that at least one Lender, is offering to advance up to 125% of the property valuation. To be fair, it's not exactly a 125% mortgage, but it amounts to the same thing.

In reality, it's a 95% mortgage plus up to 30% as an unsecured loan all at a reasonable mortgage rate. This may be varied as a 90% mortgage, and a 30% secured loan, if required.

So what's the point in instant negative equity?. Well for one, it's not negative equity, that's why the add on borrowing is unsecured. Secondly, well, there's a whole host of reasons why a borrower might use this deal to their advantage:

As an alternative to a 100% mortgage - avoiding mortgage indemnity guarantee premium costs

As an alternative to a 100% mortgage, plus stamp duty, conveyancing fees, and other fees.

As an alternative to a 100% mortgage, plus stamp duty, conveyancing fees, and other fees, plus money for modernisation and improvement.

As an alternative to a 100% mortgage, plus stamp duty, conveyancing fees, and other fees, plus money for modernisation and improvement, and repayment of an existing car loan (which would otherwise impede on the amount that could be borrowed).

Any combination of the above.

PROVIDED THAT THE SURPLUS OVER PURCHASE PRICE IS NOT USED FRIVELOUSLY, THIS TYPE OF MORTGAGE DEAL CAN PROVE A GODSEND FOR MANY PEOPLE IN MANY DIFFERENT CIRCUMSTANCES.

For example, prior to this type of deal being available, people looking for a 100% mortgage often hit major deal breaking problems. The usual cause of this was the valuation report. A lender advancing 100% of the purchase price to a first time buyer, who has not proven their ability to deal with mortgage payments, is in a high risk area of lending. If the borrower defaults, soon after completion, the lender will invariably lose money. For this reason, from my experience, valuations for 100% mortgage applications tend to be more cautious than for lower loan to value deals. Often on older properties, the valuer will request that "damp and timber reports" are obtained. Often this is accompanied by a retention.

Now there are ways around these problems, click on the links above for examples, but frequently, those that could least afford it, found that they had a further call on capital. Sometimes parents would help out, but often the deal simply fell through. This also resulted in the loss of a valuation fee, and perhaps an application fee.

With the 125% mortgage however these problems don't exist. If a little extra money is needed, it's readily available.

Another common scenario - Two young professionals, ready to leave rented accommodation and buy a property together. Their salaries are identical at £20,000pa, as are their £10,000 car loans at £240pm each over 5 years. They currently pay £600pm rent. Their credit ratings are good, due to meeting their car loan payments on time. They haven't saved much money, as they are paying off student loans, and enjoying themselves to the full. They've seen a property that they like which is on the market at £140,000.

They found a lender willing to advance them 3.5 x their joint gross income - 3.5 x £40,000 = £140,000.

Now, they've found out, after spending an hour or so completing fact finds with an adviser, that the lender will only consider them for a maximum mortgage of £119,940 as £2,880 has been deducted from each of their salaries BEFORE applying the income multiple.

Using the 125% mortgage however, they could potentially borrow up to £175,000 based on the property purchase price. They would be limited however to 4.2 x their joint income (now the full £40,000, as they will pay off their car loans on completion of the mortgage) = £168,000.

They purchase the property and pay off their car loans, with a total mortgage of £160,000. The £480pm that was required to pay the car loans is now available for mortgage payments, as is the £600pm in rent that they were paying.

Their new monthly costs, based on a 25 year repayment mortgage are 1024.58pm on a 5.89% five year fixed rate (typical APR 6.5%)

Their existing monthly costs are £600 rent, plus £480 for car loans = £1080pm.

In many areas of the UK, prices for starter homes are beyond the reach of the first time buyer. In the abscence of parental support, this strategy could enable the purchase of a property, where previously no solution existed.

To get a quote for a 125% mortgage click here