The death knell for the 100 per cent plus mortgage was sounded on Friday as Birmingham Midshires became the last of the six UK lenders that offered loans exceeding a property’s value to withdraw the product.
The move came at the end of a week that had seen five other banks, including Alliance & Leicester, Abbey and Northern Rock, exit that market amid jitters over falling house prices.
Denise Harvey, mortgage analyst at Moneyfacts.co.uk, said: “Following the credit crunch and with property prices expected to remain stagnant or decline throughout 2008, these mortgages are no longer on the menu.”
Thousands of borrowers who have already taken out high loan to value mortgages could be forced to stay with their current lender, since such a large mortgage will no longer be available elsewhere. That could leave them facing steep price rises.
In addition, several large lenders have stopped offering loan-to-values of 100 or 110 per cent.
The disappearance of such loans will increase pressure on new buyers. Mortgages of at least 100 per cent had become extremely popular since they offered a safety valve for those who did not have savings. Borrowers could use the extra funds to pay legal and tax costs.
Banks were happy to lend more than a property’s value when prices were rising fast. But as they have stalled, the risk that buyers would remain in negative equity for longer has increased.
Ms Harvey added: “It seems no one is prepared to stand out from the crowd in the current environment and accept the additional risk a 125 per cent mortgage poses.”
Two lenders, Scottish Widows and Dunfermline Building Society, remain in the 100 per cent plus mortgage market, though only for borrowers such as professionals or graduates. However, brokers predicted these were also likely to vanish.
Anyone who took a high loan-to-value deal two years ago and is looking to remortgage should find that the equity in their homes has increased sufficiently.
But those who owe more than the value of their property may have to stay with their existing lender at a significantly higher interest rate.
Alliance & Leicester, West Bromwich, Britannia and others have reduced their maximum loan-to-value in the past month from 95 to 90 per cent. Other lenders are expected to follow.