Surge in 100% mortgages means thousands risk negative equity

Thousands of first-time buyers could find themselves in negative equity following a big increase in the number of 100% mortgages available, according to new research issued yesterday.

An estimated 33,000 first-time buyers borrowed the full value of their property, or in some cases more than it was worth, between January 2006 and August 2007, said the mortgage website mform.co.uk. Such deals are allowing people to get on to the housing ladder without having to raise a deposit.

But earlier this week, the body representing mortgage lenders warned that the housing market was about to stall, and some commentators believe this has already begun. A report from the website Hometrack, published on Monday, claimed house prices fell by 0.1% during October - the first fall for two years. There has also been a warning that home repossessions could rise by 50% next year.

Homebuyers who have recently taken out 100%-plus loans are particularly vulnerable to price falls, as they have no equity to cushion them if there is a drop in the value of their home. In some cases, even a small fall in house prices would leave them owing more on their mortgage than their home is worth.

Rising property prices have meant that people need to borrow even more money to get the property they want, and lenders have responded by dramatically increasing the number of 100% mortgages available, according to mform.co.uk

"In April this year, our research showed there were 92 different 100% mortgages to choose from, but by October 1, this had increased to 160," said Francis Ghiloni, the site's marketing and business development director. "If house prices fall, as some commentators predict, those homeowners with these mortgages are likely to encounter negative equity."

The high-street bank Abbey recently began trialling the "100% Plus Mortgage", which, in addition to allowing people to borrow the full value of their property, enables them to borrow up to a further £25,000, secured on their home. Abbey suggested the money might be used for "renovating your home, buying a new car or consolidating all your debts".