The news in the media this week about the return of the 125% mortgage is causing a bit of a stir and much controversy following the lessons of the credit crunch.

The largest building society in Britain, the Nationwide, is now offering 125% mortgages to its existing customers who are otherwise unable to move house because they are in negative equity, and reportedly, other lenders are considering a similar move.

Seeing as the FSA and the government have discussed banning 100% mortgages altogether, is it right that lenders should be able to once again offer 125% mortgages?  Or is it ok seeing as this is only to existing borrowers with a good payment history who need to move home?

The 25% drop in house prices has meant that around 1 million homeowners are in negative equity at the moment, according to the CML (Council of Mortgage Lenders).

Lloyds TSB, the Halifax and Coventry are a few named lenders who do already allow their existing customers to switch to a fixed rate deal for security rather than go onto the insecure standard variable rate but the Nationwide is the first to allow customers to move house whilst needing this sort of mortgage level.

Ray Boulger, senior technical manager at broker John Charcol, said: “A number of lenders did this in the early Nineties but Nationwide is the first to do it this time around.  It is a very welcome move which will help customers in negative equity. Another two other lenders are considering doing something similar and by the end of the year we will have more lenders offering this facility.”

Of course, there is a small catch with the Nationwide in that the better interest rate is only available on the value up to 95% loan to value, then the remaining 30% will be on a higher interest rate.

A spokeswoman for Nationwide said: “It is a very unique situation where existing borrowers in negative equity are coming to us to say they need to move house. These borrowers need to meet all our normal criteria for risk and affordability”.

Naturally, this sort of things increases the options that mortgage advisors can explore for their customers and is good news for those undergoing CeMAP training to enter the industry as it widens options and will help continue the kickstart the housing market is seeing now, but is it the right thing to do or should customers be encouraged to reduce their equity?

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