At the height of the property boom, mortgage providers devised an ever increasing number of ways of extending larger amounts of credit to their customers. One such product, which allowed borrowers to take out a mortgage in excess of the value of a property, was the 125% mortgage. Despite the decline in popularity of the product owing to the effects of the credit crunch, there are still a number of mortgage providers who offer 125% mortgages.
What are 125% Mortgages?
A 125% mortgage is a product that in essence allows a borrower to take out total borrowing in excess of the value of the property the individual wishes to buy. The 125% mortgage is not actually a single loan, but in effect two forms of credit rolled into a single product.
The first part of the loan consists of the mortgage itself; typically this will account for around 90% of the value of the total loan and will be secured against the value of the property, as with any other mortgage product. The second part of the loan consists of an unsecured loan that makes up the balance of the total loan to be issued. So as to create the appearance of a single mortgage product, both loans will typically be issued at the same interest rate and a single monthly repayment will settle both elements of the 125% mortgage.
125 Mortgages: Why Get a 125% Mortgage?
It may appear strange to wish to borrow more than the value of a property; however, here are a number of reason for which one may consider opting for a 125% mortgage:
- Additional Costs – When buying a house there are many additional costs such as conveyance fees, product fees, taxes and other legal charges. In order to cover these additional costs one option is to borrow in excess of the value of the home in the form of a 125% mortgage.
- Home Improvements – If buying a property which has substantial potential for an increase in value due to home improvements, one option is to borrow more money than the value of the property in the first place. The excess is then used to fund home improvements which the buyer hopes will increase the value of the property either to the value of the total loan issued or beyond.
- Negative Equity – Although a risky option, if wishing to move, but in a position of negative equity, it may be necessary to borrow an amount of money in excess of that of the new property to be purchased. In such a case, the borrower must take out a mortgage which covers not only the value of the new property, but also the short fall in equity of the property to be sold.
The 125 Mortgage: Issues with 125% Mortgages
The main issue with the 125% mortgage may be seen as one of cost. Put simply a loan to an individual in excess of the value of the property represents a greater risk to the lender. As such, those taking out a 125% mortgage can expect to pay a higher rate of interest than those borrowing within the normal mortgage borrowing limits. In addition, those applying for 125% mortgage products may also incur greater product fees than are incurred on standard mortgage products.
Finally there is the personal issue of affordability. In taking out any extended mortgage product, an individual should consider carefully whether or not they can truly afford the repayments. This may be even more of a concern where a variable interest rate mortgage is entered into. Such products have the potential to create steep rises in the amount of money required to fund monthly repayments, dependent on the underlying interest rate issued by the central bank.
In summary, 125% mortgages are now a product which many may find difficult to access. However, if one has a good credit rating and the right reasons for taking out 125% mortgage, there are still mortgage providers in the market offering 125% mortgage deals.
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Frank Smith - Frank Smith currently works as an full time industry analyst for a well known construction company in Lincolnshire. In his spare time, ...
