Mortgage Greed on Both Sides
April 2005
Bradford & Bingley has announced a 130% mortgage called the Max130.
This is offered through its lending arm, Mortgage Express. The mortgage has caused some uproar not just from the 130% offered on the home value, but also because of the high interest rate.
Basically the mortgage allows clients to borrow 30% more than the value of the property. A client can borrow £130,000 on the back of a flat valued at £100,000. The bank says it's designed for either first time buyers struggling to get onto the property market or people with high personal debts who want to consolidate. The bank adds that the deal is not available to people with a bad credit rating - See Find's list of adverse credit mortgage brokers for more help - Click Here.
What's The Problem?
Simple, anyone taking out the loan is automatically put in negative equity situation, in that their debts are now worth more than the value of their property. If in the future they want to move then they're going to have to find the money to repay the difference between the loan value and the property's worth. In the example above (a £130k mortgage on a £100k value flat) the difference would be £30,000.
Of course, if the house price boom continues over the coming years deals like this (apart from the high interest rate) will look like great business. But trends do not last forever.
Any Advantages?
- As mentioned above, if property prices continue to rise at a double-digit rate then high gearing is often an advantage
- If you have a large income but no savings then the mortgage can be used to fund a deposit
- If you have large debts elsewhere (Credit Cards, Car loan etc) at higher APR's then the mortgage can actually save you money BUT not if you string these debts out over 10-25 years which many are likely to do
Lending Criteria
- Single applicants can borrow up to 3.75% annual income, couples 2.75 combined earnings
- People with bad credit ratings won't have much luck
Interest Charges
The mortgage is very expensive at 6.49% interest. This is over 1.5 2% higher than the best-buy 3 year fixed deal offered by The Cheshire Building Society. After the 3 year fixed period ends, borrowers will revert to the lender's more expensive standard variable rate (SVR) which is currently 6.55% (1.8% higher than the Bank of England base rate).
Summary
As long as you know the risk and costs involved the mortgage deal might not be as bad as it first looks especially if you have other debts paying higher APRs and want to consolidate over the short term. But if you're blinded by house prices and are desperate to get on the property ladder whatever the cost then the phrase negative equity may well come to haunt you over the next few years.
See Also
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