End of the 100 per cent mortgage as young buyers are forced to produce a deposit
Last updated at 11:51am on 20th February 2008

• Alliance and Leicester shares plunge to lowest ever level
• Surprise mortgage lending rebound

Mortgages which let people borrow more than the value of their home were dramatically scrapped yesterday.

Before Christmas, a third of lenders offered mortgages of 100 per cent or more.

Today, just one in ten do so.

To add to the gloom, a member of the Bank of England's monetary policy committee predicted last night that mortgages could become more expensive this year.

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Financial pressure: The new era in loans will force would-be buyers to produce a deposit

Kate Barker also warned of clear signs of a "marked weakening" in the housing market.

She blamed the severe problems faced by banks trying to borrow money since global markets were gripped by the "credit crunch".

Despite the gloom there was a surprise rebound in mortgage lending during January with total advances jumping by 11 per cent, figures showed today.

The Council of Mortgage Lenders said £26.5 billion was lent during the month, up from £23.92 billion in December, and in line with the figure for January last year

However many experts fear that a newly-nationalised Northern Rock is about to raise rates for many of its borrowers, prompting other lenders to follow suit.

The "super-size" 125 per cent mortgages are often taken out by desperate young first-time buyers and cash-strapped divorcees.

They need the extra money for stamp duty, legal fees, decorating and other costs, but are instantly plunged into negative equity because the value of their home is less than the size of their loan.

Now mortgage companies have finally caved into criticism that lending such huge sums is wrong.

Experts say there are two reasons for the retreat - lenders themselves are struggling to raise money for loans, and they are worried about handing it over to the highest-risk borrowers.

Alliance & Leicester was the first to make the move, axeing its "Plus Mortgage" range which offered up to 125 per cent. A few hours later, Abbey, the second-biggest mortgage lender, and Coventry Building Society said they will scrap their deals on Friday. Northern Rock, which pioneered the 125 per cent deal nearly a decade ago, is likely to follow in the next few days. That would leave just Birmingham Midshires with a 125 per cent product, and it is unlikely to want to stand alone. Analysts have already pointed to Alliance & Leicester as a lender that could experience similar problems to the Rock if the credit crunch continues, because it relies heavily on raising money from global money markets. The moves came amid warnings that the Northern Rock fiasco could trigger pain for mortgage holders across the High Street.

Alliance & Leicester has now axed its Plus Mortgage range which offered up to 125 per cent

The bank is expected to move quickly to reduce its liabilities by slashing the size of its mortgage book.

Industry insiders expect new chief Ron Sandler to try to persuade as many as half the Rock's mortgage-holders to take their business elsewhere by jacking up rates.

Tens of thousands of borrowers coming to the end of fixed-rate periods could be particularly badly hit.

In turn, the increase in rates at Northern Rock could be used by other lenders as an excuse to do the same.

Tory spokesman Philip Hammond said last night: "If any major lender decides to discourage customers from renewing when their fixed terms are up, that's bound to exert upward pressure on rates across the market.

"Some people, particularly those with poor credit records, are sadly likely to find they are unable to continue with their mortgages."

Louise Cuming, head of mortgages at moneysupermarket.com, said: "There's absolutely no doubt Northern Rock was walking a seriously risky tightrope.

"They were offering four or five times income.

"People who have borrowed a lot for their mortgages often don't stop there, and may have gone on to acquire other unsecured debts.

"There will undoubtedly be some who won't be able to rehouse elsewhere."

Mega-mortgages have become common only over the last decade, fuelled by people's desperation to get onto the property ladder before prices soared further out of reach.

Industry sources estimate up to 20,000 loans every year have been handed out to people borrowing 100 per cent or more.

But the numbers have slumped since last September's Northern Rock crisis.

Ray Boulger, from mortgage advisers John Charcol, warned: "If a borrower gets into difficult with little or no equity in their home, they've got nowhere to go."

He said a falling housing market and homeowners with 100 per cent or more mortgages can be a fatal combination.

If they are forced to sell, they may have to cut 10 per cent off the asking price to find a buyer - making it more likely the sale price will be lower than their loan.

There is another major concern for borrowers who have taken out such deals.

When their initial two or three-year arrangement ends, they may struggle to find a lender willing to give them a similar mortgage.

David Hollingworth, from mortgage advisers London & Country, said: "If these deals do not return, borrowers are going to have to work a lot harder to reduce their debt."

The decision to axe 100 per cent deals will further turn the screw on first-time buyers, whose mortgage repayments account, on average, for a staggering 35 per cent of their disposable income.

The number of first-time buyers has already fallen to its lowest since 1980, according to research by the Halifax.