Home buyers can no longer borrow more than the value of their home. All lenders have stopped selling 125 per cent mortgage deals from today, amid fears that the deals were exposing the lenders to further bad debts and may have already left thousands of first-time homeowners facing negative equity.

Northern Rock and Birmingham Midshires, owned by Halifax, last night scrapped their mortgage deals offering 125 per cent of a property’s value. The deals were made up of a mortgage for up to 95 per cent of their property’s value and a 30 per cent unsecured loan on top, usually capped at £30,000.

The decision comes after four other lenders, Abbey, Alliance & Leicester, Coventry Building Society and Godiva, announced they were pulling similar deals earlier this week.

Meanwhile, first-time buyers who haven't saved a deposit are struggling to get a mortgage deal. Twelve lenders have withdrawn their 100 per cent deals in recent months. Bank of Scotland withdrew its 100 per cent mortgages this week.

The 125 per cent deals were popular among cash-strapped first-time buyers as they did not need a deposit, and could use the additional loan to cover stamp duty costs and to furnish their new home.

However, concerns that the mortgages expose homeowners to the risk of negative equity, leaving them unable to pay off their loan, have been raised because of fears that house prices are falling. Analysts predict that house prices, particularly the prices of one and two-bedroom new build flats that typically attract first-time buyers, could nose-dive over coming months.

Borrowers who currently have a 125 per cent deal could find themselves facing huge rises in repayments, or even struggling to get a mortgage when they come to the end of their deal.

Several lenders said that they would offer "roll-over" deals for borrowers coming off the deals, but there was no indication what these deals will be.

Homeowners who switch the "mortgage" portion of their loan to rival lenders will have to pay punitive rates on the remaining unsecured loan. Northern Rock will charge nearly 15 per cent interest, while Coventry and Alliance & Leicester will charge around 12 per cent on the outstanding loan.

Those who stay with their lender may also have to fork out more for the mortgage. A homeowner with a £100,000 loan coming off a 6.49 per cent two-year fixed rate will have to pay an extra £112 a month on Northern Rock’s 7.84 per cent Standard Variable Rate.

Northern Rock, where Together mortgages account for 24 per cent of its loan book, had come under increasing pressure to stop selling the loans after it came under government ownership at the weekend, amid accusations that the deals were an example of irresponsible lending. John McFall, the chairman of the Treasury Select Committee, criticised the deal in a House of Commons speech on Tuesday.

Experts said that the withdrawal is in line with Northern Rock’s strategy to withdraw from the mortgage market until its funding problems are resolved. The bank wrote to all of its mortgage borrowers this week to tell them it will not be able to offer a competitive rate when they reach the end of their current loan, and instructing them to seek independent financial advice.

David Hollingworth, of London & Country, the mortgage broker, said: “Lenders are pulling the deals because of the prospect of falls in house prices. The result is the virtual extinction of loans worth more than 100 per cent. The outlook for existing borrowers with these deals are poor. I would urge all lenders to ensure they have a plan in place so that their customers do not get trapped paying an expensive Standard Variable Rate.”

Denise Harvey, Mortgage Analyst at Moneyfacts.co.uk, the financial information website, said: "“It seems no one is prepared to stand out from the crowd in the current environment and accept the additional risk a 125 per cent mortgage poses.

“While property prices were increasing, the risk was one that a number of lenders were prepared to take, but following on from the credit crunch and with property prices expected to remain stagnant or decline throughout 2008 these mortgages are no longer on the menu."

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