18 March 2008
PROPERTY CRASH LOOMS AS 125% MORTGAGES ARE WITHDRAWN
For those caught out by the property collapse of the late 1980’s negative equity lead to widespread repossessions and bankruptcy. With the last of the 125% mortgages being withdrawn yesterday the government and homeowners will be hoping that history will not repeat itself.
Until recently the high street banks were clambering over themselves to offer first time buyers mortgages greater than the value of their home. By yesterday tea time the last of the major lenders had pulled the plug on such deals.
In the wake of the collapse of Northern Rock in February the Alliance & Leicester and the Coventry Building were among the first to withdraw their 125% mortgage deals. Yesterday, after giving brokers only ten minutes notice, Scottish Widows, owned by Lloyds TSB Bank plc, withdrew their 125% mortgage.
The reason for the popularity of 125% mortgages is easy to see. Hard pressed first-time buyers, faced with escalating property prices, had little choice but to snap up the mortgages, which seemed to many to be the only way onto the property ladder.
Put simply, fuelled by cheap money and a belief that property prices would go on rising forever, mortgages were being inflated to pay for other spending.
At the beginning of the year it was still possible for wanabe homeowners to increase their mortgage to fund their removal costs, stamp duty, a new kitchen, a car and even the wedding! For the time being those days are well and truly over.
With 125% mortgages at an end Britain’s 12 million borrowers needing to re-mortgage will find it increasingly difficult to find a bank willing to provide a mortgage in excess of the properties value.
In the late 1980’s with mortgage rates at 16%, combined with the Conservative Government’s withdrawal of Mortgage Interest Rate Relief at Source (MIRAS) property prices plunged and negative equity plagued the property market for years to come.
Negativity equity and a prospect of a property crash are back, but this time the banks have only themselves to blame.
Peter Schiff was Right 2006 2007.
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