Nationwide Building Society has said that it is to reintroduce the controversial 125 per cent mortgage, previously banished from the mortgage market as the culprit responsible for plunging many of its customers into negative equity.
When the housing market started to slide, with tumbling house prices frozen money markets, mortgages were suddenly hard to come by, and those who borrowed up to 125 per cent of their property's value have been some of the worst hit, finding themselves owing much more than their house is worth and unable to remortgage.
This situation has led to people being trapped in their homes by negative equity. Many have wanted to reduce their mortgage and outgoings by moving to a smaller property, but have been unable to do so because they cannot sell their house in the current market.
Nationwide, the UK's largest building society, has said that it will lend some existing customers up to 125 per cent of their new property's value, so that they are able to move house, by absorbing the negative equity into a new mortgage.
But, the new 125 per cent mortgages do not mark a return to the irresponsible lending seen by the likes of Northern Rock, said a Nationwide spokesperson, rather, "a small number of existing customers" could be offered a loan of up to 125 per cent, depending on their circumstances.
The loans will enable customers to move, but in a responsible way, the spokesperson said, and should not interpreted as a relaxation of Nationwide's lending criteria.
Nationwide borrowers will only be able to borrow 95 per cent of the new property, so they still need a deposit of five per cent, but they can carry over the negative equity from their previous property, up to a maximum of 125 per cent of the value of the new property.
"Borrowers will need to go through our normal checks to ensure they can afford the loan. We are not relaxing our lending criteria and are making sure we do not lend people money they cannot afford to repay," the spokesperson stressed.
Customers can choose a three or five year fixed rate mortagge; the three year deal comes with a rate of 6.73 per cent for the first 95 per cent of the loan, and 7.23 per cent of the negative equity carried over, the five year deal will cost 7.48 per cent and 7.98 per cent, respectively.
Commenting on Nationwide's 125 per cent mortgage, Louise Cuming, head of mortgage at comparison website moneysupermarket.com said: "Three cheers for Nationwide: at a time when overly restrictive and cautious lending practices are holding the housing market back, Nationwide's flexible approach is to be welcomed."
To those who would criticise Nationwide for reintroducing the controversial loans, Ms Cuming explains: "As Nationwide already has a relationship with these customers and visibility of their payment history they can ensure that they are extending these loans responsibly. And the truth of the matter is if the customer is in negative equity they already have a mortgage of greater than 100 per cent before Nationwide enables the customer to move house."
Ms Cuming hopes that the move from Nationwide mortgages will encourage other lenders to follow suit and help to revive the mortgage market.
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