Abbey mortgage flies in the face of reason
By Damian Clarkson     28th September 2007

Since Northern Rock committed financial hari-kiri, mortgage players have been forced to reconsider any fast and loose lending practices. But apparently one player never got the memo.

Banks have long been throwing money at customers, who in turn have racked up record levels of debt. And with a credit crunch arriving, lenders are tightening their lending rules in order to avoid the same fate that befell the Rock.

Norwich & Peterborough Building Society and Yorkshire Building Society’s subsidiary Accord have both pulled their 100% mortgages in the name of fiscal responsibility, and market analysts unanimously agree the era of reckless lending is at an end.

But then…

Compare the best fixed rate mortgages here

Spot the odd one out
Two weeks ago Abbey raised the rates on some of its mortgages, and followed this up by launching its '100% Plus' mortgage range which covers the full value of a house with up to £25,000 bundled on top.

In other words, it has made certain lending more expensive and then promised to lend customers more money than ever before. Fiscal responsibility this isn't – even the way Abbey describes the products on its site suggests a complete ignorance about the current market conditions.

"What can you use the additional borrowing for? We don’t mind what you want to use the money for…" That's right folks. Never mind the credit crunch, just keep spending and don't worry - it won't cost you a penny… right now.

Earn tax free interest on your savings

Short term gain, long term pain
The lure of any mortgage offering 100% plus loan to value (LTV) is plain to see: You get to buy your house immediately without paying a cent, and you have cash left over for stamp duty, solicitor’s fees and a gigantic flat screen TV too, if it takes your fancy.

But these mortgages always come with higher rates as you are considered a higher risk without a deposit. Speaking of which: If you are not in a strong enough financial situation to save up even a 5% deposit, are you really ready to take on such a massive amount of debt?

Abbey is the first to offer the entire amount as a secured loan, so defaulting on any part will cost you your home. And with an eye-watering 7.84% typical AER, failure to switch to a new discount rate - even for a short while - could leave you in similarly dire straights.

Hardly a tough challenge, then.

Click here to compare tracker mortgages

Taking on a unpredictable market
Then there's the negative equity nightmare, meaning you owe significantly more money than your house is worth. When you take out such a mortgage, you're essentially banking on the fact that the tumultuous property industry – ravaged by the Northern Rock meltdown, US sub-prime crisis, HIPs fiasco and rate hikes dampening demand – will surge onwards regardless.

"If prices rise at the pace seen over the last few years, this can soon be recouped, but it is unlikely this growth rate is sustainable," warns Moneyfacts mortgage expert Julia Harris. You also need to remember that negative equity means you’re essentially stuck with that property until you 'break even'. This is especially risky for younger people, who often find new opportunities arising elsewhere in the country, but will be unable to take advantage of them as a result.

Abbey is by no means the only lender to offer a 100% plus mortgage, with Alliance & Leicester, Birmingham Midshires Solutions, and Northern Rock also on the offending list.

Debt advisory group Credit Action summed it up beautifully when it described customers who went for such a mortgage as “either brave or stupid”. Having launched its product at the start of a credit crunch, the same could be said of Abbey.

Click here to compare tracker mortgages

Stomping on rival turf
There would have been ample time to delay the roll out, so what is it Abbey is trying to achieve here? Most likely it’s an attempt to snatch a load of business off of Northern Rock, very much the wallflower at the mortgage party, by letting customers know that easy credit is still up for grabs.

And with many other lenders leaving the 100% LTV arena, it is gambling that demand still exists in this space and positioning itself to become the major player. And of course if there’s less competition, they can charge even higher rates too.

Compare fixed rate mortgages here

Cancel debt, save a deposit
With house prices rising faster than average income, people often feel forced to jump on the housing ladder before the gap widens further.

And while it's true that property will generally be the best investment you make, doing so when you're simply not ready could be disastrous. Buying a home with no deposit is unwise. Slapping an extra £25,000 extra debt on top of it is madness.

Pay off any existing debt then get saving on a deposit, even if it's just 5%. It will take longer, but at least you will be making that investment on a sound financial footing.

Earn tax free interest on your savings

Article produced by EveryInvestor.co.uk