125% Mortgage Disadvantages

125 Percent Mortgages

A 125 percent mortgage is a mortgage product that allows the home buyer to borrow 125 percent of the value of a property...

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125% Mortgages are no longer available. Available options similar to this type of discontinued product are ‘Minimum 10% Deposit’ and ‘Shared Equity Mortgages’.

If you would like to inquire about either a minimum 10% or a shared equity mortgage click on the FREE QUOTE button.


What Are The Disadvantages Of A 125 Percent Mortgage

Although Northern Rock’s ‘Together’ 125 percent mortgage has proved popular with many borrowers, relatively few other mortgage providers have followed this financial institution’s lead and introduced ‘copycat’ mortgage products. Does this mean that there are greater risks involved with a 125 percent mortgage.

Disadvantages for the Borrower:
Just like any other mortgage, borrowers risk losing their home if they default on their monthly repayments. In addition, because 125 percent of the value of the property has been borrowed, even if the property is repossessed, the lender is unlikely to recover all money owing and so will probably pursue the borrower for any outstanding debt beyond the amount realised from the sale of the property, itself. So, not only would the borrower have lost their home but they would also risk bankruptcy.

In a stable market, the value of a property can be expected to rise, over time. So, should you need to sell in a few years time, it is likely that you would have gained sufficient equity be able to pay off your 125 percent mortgage. However, if property values fall, as they did in the early 1990s, then you risk owing far more than the property is worth (‘negative equity’) if you are forced to sell.

The interest rates charged on 125 percent mortgages are higher than on more conventional mortgages. If you can afford to put down a deposit on a property and meet the income criteria for a mainstream mortgage, a 125 percent mortgage is probably not the best option.

Disadvantages for the Lender:
Offering 125 percent mortgages on high income multiples encourages some borrowers to overstretch their commitments, resulting in a potential increase in a bad debts.

Any significant fall in property prices would probably cause more borrowers to default on their mortgages, with the problem being particularly acute for those with 125 percent mortgages.

Similarly, if general interest rates rise, then 125 percent mortgage holders risk getting ‘squeezed’ by rising monthly repayments, proportionately more than other borrowers, leaving the financial institution more open to the risk of bad debt resulting from defaulting on the mortgage.

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