to wonder why anyone in their right mind would want to take out a 125% mortgage?

[wannaBe]

Obviously these mortgages aren't really as available now as they were a year or so ago.

But earlier I caught the end of a discussion about Northern Rock and how people didn't consider the reality that when they take out a 125% mortgage they are already in negative equity as soon as they move in.

I can kind of see why someone might take out 100% although even that would be risky IMO, but 125%? why why why? Surely if you had that much debt that you needed an extra 25% of the value of your new home to cover it then that's not really the best time to be considering buying a house in the first place?

We did. Back in 1997. Why? Because we were in a one-bed cottage with a new baby. There was no way we could have coped for very long. We were in negative equity to the tune of about £15k. So we took a 125% mortgage to cover the neg equity and the purchase price of the new house. The assumption being that the crash was short-lived and the new house would grow in value. It did. Massively. But I agree it was a risk.

Exactly wannabe - just what DH and I were saying last night after watching the stupid 125% mortgage woman on the news - did she not do her calculations or is being stupid a get out for getting into bad debt?

It is obvious that banks are run by arseholes. They offer ridiculous mortgages and loans constantly, make billions of pounds in profit and then cry when things turn bad and ask the government to bail them out and guarantee mortgaGES.

And people who borrowed a ridiculous amount of money for a house are daft, even more so if it was for a 'dream home'.

'conventional wisdom that house prices only go up' - surely people are capable of remembering what happened 10-15 yrs previously without relying on conventional wisdom

pointydog - it depends how old you are and where you live

Do you remember the state of the economy when you were ten years old? When you were 25 would you have remembered the state of the housing market 10 - 15 years previously?

Plus, the 90s crash was limited. In Scotland I keep hearing "but prices have never gone down here"

Plus, older people remember high wage inflation at the same time as inflation in house prices. My family and my DH's family urged us to take out as big a mortgage as we could manage because they remember that in the long run, that was the right thing to do. This time around the inflation has moved from property to food and fuel without wages being noticably increased!

There is an issue in diferent parts of the country - when we bought, 6 years ago, it was very common in nice bits of Glasgow and Edinburgh for flats to go for thousands over the valuation price, in Scotland's sealed bid "offers over" system. We missed out on 5 flats before we (over)bid for ours. Everybody we know who bought at the same time went for 100% or more because nobody had a deposit big enough to cover the difference between the valuation and the sale price. Madness - but it reflects the insanity of the housing "market" rather than the madness of individuals, I think.

I think we'll be fine, but I had sleepless nights about it. No way that I would do it now.

Well, to be fair, they do only go up, with the occasional downturn. If you look at the property crash of the late 80s/early 90s, there was huge panic about negative equity, repossessions, etc. However, 10 years later, all those properties were worth at least twice their 80s value. Negative equity is only a problem if you have to sell.

What we are seeing now though, which wasn't really prevalent in the last crash, is a rapid increase in the cost of living overall which means that more people are struggling to pay all their bills, including mortgage, resulting in more repossessions or people desperately trying to sell their properties to prevent repossession.

The difference as I see it now is that people have been paying silly money for property for quite a few years and buy-to-let is bigger than in previous periods. So the crash is much much bigger and affects more people more severely.
Our neg equity was £15k. On a similar house now it would be more like £50k. Totally different scale.

upwind, I agree with you to some extent. But older friends and relatives should have a pretty good idea of economic peaks and troughs. I have a pretty good idea now (and I am not a financially astute person)which I'll be able to pass on to children without relying on myth and rumour.

And the Scottish system is awful, you're right, fire.

I agree with Freckle, it will all turn around again soon. Some people have not choice whether they get a 125% mortgage it is not always down to wanting a big house. We pay a huge mortgage (well round where we live it is huge). My DP also pay his Ex's mortgage. It is a struggle but we have no choice. We rented for a while but it is dead money and we were never able to save anything either. Like someone else said negative equity is only a problem if you need to sell. Anyone buying at the moment probably won't want to sell straight away. Give it a couple of years and we will be having a housing boom again. As for stamp duty they should ban it altogether.

The trouble is that when housing looks like such a one way bet people will do anything to clamber aboard the gravy train. Yes it's silly but when everyone bangs on about how their house earns more than they do you can understand why people want a piece of the action.

I personally believe that if lending institutions hadn't been so fricking irresponsible and lent such stupid sums the housing market would never have over heated the way it did - it simply would have calmed down until wages caught up with increasing prices.

These are the same institutions now being bailed out by the taxpayer, but still foreclosing and repossessing very quickly. I can't help thinking that the solution with the lowest sum of human misery in the long term is let weak banks go bust.

Can you even get a 125% mortgage anymore?

No - you have to have 90% minimum these days I think. I think the 125% mortgage is dead and buried and frankly, that isn't a bad thing.

I meant 10% minimum - agggghh you know what I mean.

I do feel like rent is 'dead money' more than a mortgage is. In a normal market, rents generally seem to rise, and mortgages eventually go down. Also, I don't want to pay for someone else's 2nd property. I've been quite happy to rent from the council though.

Maybe they should teach 'finance' in school? I am 27 and as far back as I can remember (being interested in that kind of thing) house prices have always risen. I took a 90% mortgage, by the way, but I don't think it is only stupid people who took the risk of higher.

Also, isn't it customary to feel sorry for people who've done stupid things, not annoyed with them?

I bought a flat in 2006 with my partner and we got a 125% mortgage. We were desperate to live together and had no deposit or savings so it was our only choice. We moved out 2 years later and made enough money to put a deposit down somewhere else.

Wouldn't do it now though with the house market the why it is. Some first time buyers don't have much choice.

but even if the banks are prepared to lend you 5x salary, the repayments aren't kept a secret, you know how much you'll be repaying so if you can't afford it then it's down to you not to borrow the money, surely?

When we bought our house the banks were prepared to give us a finominal amount of money. But even if we could have met the repayments, if interest rates had gone up then we would be in serious difficulty, and there was just no way I was prepared to put myself in that much debt.

People need to be more financially aware. Yes the banks are prepared to lend serious amounts of money, I could have a new credit card every week if I wanted to, but it doesn't mean I could afford to pay it all back, and that's where the self responsibility comes into it, surely?

The bank make it all sound so easy and really sell it to you. We saw it as a flat and a bit of extra money. Didn't really understand the interest rates and the different type of mortgages on offer so just got carried away with it all.

We were alot more careful when buying our second home but still had to take a mortgage over 35 years which i'm sure not everyone agrees with. It was the only way we could afford monthly repayments

Hanaflower, rent is dead money because at the endof it you are lining someone elses pocket and will never own the house. Paying interest to the bank is how mortgages work, at least you will own the house at the end of it and if you die before it is paid off, any profit on the house will go to your next of kin. I will be 66 years old when my mortgage is paid off which I find quite depressing, however I have no choice.

we bought our first flat 110% cos we had no deposit and paying rent meant we could never save for a deposit. we gained much more in equity than we ever could have saved in teh same amount of time.

makes sense in a rising market and if you can repay the mortgage comfortably.

I actually think Northern Rock are largely to blame in this situation.
People who bought houses with over 100% mortgages bought them because they did not want to rent any more and were scared of missing the boat with rising house prices(House prices are still higher now than they were three years ago). Also there are some people with good salaries who just have no savings. This type of mortgage helped them get on the housing ladder. However where they are now struggling in that as they come to the end of their particular rate deal, that rate is now going to go up massively. This is what is making the mortgage unaffordable. Northern Rock would rather increase the pay rate, have the people default on the loan so the house will be sold and Northern Rock will make a loss as the house would be sold for less than the mortgage. If Northern Rock were to make the clients a reasonable offer on the mortgage rate they would be able to afford the mortgage carry on paying and so both parties would be in a win win situation. Bear in mind thst Northern Rock have already bought the money to lend on the market place a few years back when interest rates were cheap anyway. So they will not be losing moeny on this.
I actually think this is a political decision being made in that Northern Rock wants to rid it self of the high mortgages so it will be easier to sell as a going concern at some point in the future.
Yes I agree that there is a personal accountability of the individuals to consider as well but I bet on the whole most of the people who have had 125% mortgage over the last 7-8 years have done quite well by them.