Negative equity: it's back, it's instant and we're heading for a property slump
What a fine bunch of money lenders they are at the Abbey. There I was trying to find evidence of negative equity for a blog on house price crashes and the former building society does the legwork for me - with the launch of its 125% mortgage.
OK, so it's not the only lender that is offering buyers the chance to ruin their lives with one phone call.
Our friends at Northern Rock have the romantically charged 'Together Mortgage' that seems to sell the idea of instant negative equity as though you've just won a prize you'll be able to boast about for years to come. Don't worry, you will.
If you are lured into this honey trap and borrow more than your home is worth, you are asking for trouble. The myth behind the loan is that house prices will keep rising when the opposite is fast becoming the case. The rational view is that they will fall.
Here's some maths. You buy a £200,000 house with a £250,000 (125%) mortgage at a mere 6%. That will cost you £1,610 a month every month for 25 years. If the rate went up to 8% - a modest estimate in the current climate - it would suddenly cost £1,930 a month. If you cannot afford that, then your only option is to sell.
Assuming you can get the same price you paid - probably unlikely - you will, with moving and legal costs, walk away with no 'mortgage' but still have a loan of £55,000-£60,000 to repay.
Maybe that's why the Alliance & Leicester calls its 125% mortgage the PlusMortgage.
The problem with Abbey's foray into this hateful, irresponsible world of providing crippling debt to the naive and vulnerable is the timing - bang in the middle of the biggest banking crisis for nearly 150 years, matched with an overheated property market that makes the heady days of Thatcher's boom and recession look like a squabble over small change at the greengrocer's.
If you're too young to remember the 1990s, which it seems the whole country has, the final throw of the dice before it all went wrong and the banks stopped lending altogether was the 125% mortgage.
If you're too young to remember the 1970s - as I am - listen to this chat between eminent City commentators Mickey Clarke and Anthony Hilton of the Evening Standard. Because that's where we're headed.
City briefing (6mins 19 seconds):
'After several years of easy money and a lot of speculation on property the botttom line is too much money invested in property with too high debts. The only way to repay the debt is by selling the property and prices will fall. There will be a property slump.'
- Anthony Hilton, Monday 24 September 2007
Thank you Abbey.
Richard Browning This is Money
Abbey under fire for 125% mortgage
Warning of 1990s-style property crash
Housing market is heading for a fall
Property asking prices take £6,000 tumble
Will Northern Rock chaos hit mortgages?
House prices fall for the first time in two years
The Northern Rock fallout - how this mess affects you
Can the UK avoid a house price crash?
Mortgage rates soar as credit crunch bites
My buy-to-let dream cost me everything
Don't panic over higher mortgage costs
Abbey fails relatives of deceased customer
Abbey tops list of rip-off bank charges
Investing: Abbey's habit is a poor one
A sting in the tail of Abbey's new account
And one from a year ago
House price storm is brewing
The credit crunch chronicles
Negative equity: it's back, it's instant and we're heading for a property
The Northern Rock loan for 80 year olds with a job
Northern Rock and the Picture of Modern Britain
It is crazy what people will do that get blinded by the dollar signs. It is crazy to take out a 125% mortgage yet people do it every day so they can get or keep that boat. when are we going to stop borrowing our brains out!!
Posted by: chet the vet | December 25, 2007 at 02:38 AM
Thanks so much for giving us (first time buyers) the hope we need!
Posted by: Elaine Hurst | October 08, 2007 at 04:59 PM
What a great post - thanks for injecting some humour into what is a very depressing reality. Good work!
Posted by: sam p | September 26, 2007 at 10:06 PM