125% Mortgages – What Were They and Are They Still Available?

125% Mortgages Explained

A 125% mortgage is a type of home loan that allows borrowers to borrow more than the value of the property they are buying. For example, if a property is worth £200,000, a 125% mortgage could allow borrowing of up to £250,000. The additional borrowing was traditionally used to cover costs such as legal fees, stamp duty, moving expenses, home improvements, or to consolidate existing debts.

These mortgages were particularly popular during the property boom of the early 2000s, especially among first-time buyers who had little or no deposit. However, they became closely associated with the risks that contributed to the financial crisis of 2007 and 2008.

What Happened to 125% Mortgages After the Credit Crunch?

Before the credit crunch, some lenders were willing to offer mortgages at 100%, 110% or even 125% of a property's value. The assumption was that house prices would continue to rise, allowing borrowers to build equity over time.

When property prices fell during the financial crisis, many borrowers found themselves in negative equity, meaning they owed more on their mortgage than their home was worth. This made it difficult for homeowners to remortgage, move house, or sell their property without incurring a loss.

As a result, lenders reassessed their appetite for risk and withdrew many high loan-to-value mortgage products from the market. 125% mortgages virtually disappeared overnight, and for many years were considered a thing of the past.

Are 125% Mortgages Available Today?

Traditional 125% mortgages remain extremely rare in the UK mortgage market. Most mainstream lenders now require borrowers to contribute a deposit and have much stricter affordability assessments than those seen before the financial crisis.

That said, some lenders have introduced products designed to help buyers who have limited savings. These may include:

• 100% mortgages for eligible borrowers.
• Family-assisted mortgages where parents provide security or savings support.
• Guarantor mortgages.
• Deposit-free mortgage schemes offered by a small number of lenders.

While these products may help buyers purchase a home without a large deposit, they are not usually the same as the traditional 125% mortgages that were available before 2008.

Lending regulations are also significantly tighter than they were in the years leading up to the credit crunch, with lenders required to carry out detailed affordability checks before approving an application.

How Did 125% Mortgages Work?

Although often referred to as a single mortgage, many 125% mortgage products were structured in two parts:

• A standard mortgage covering up to 95% or 100% of the property's value.
• An unsecured loan providing the additional borrowing above the property's value.

This allowed borrowers to purchase a property and cover associated costs without needing savings for a deposit or moving expenses.

Advantages of 125% Mortgages

When they were widely available, 125% mortgages offered several benefits:

Buy Without a Deposit

The biggest attraction was the ability to buy a property without having to save a substantial deposit.

Cover Additional Costs

The extra borrowing could help pay for legal fees, moving costs, furnishings or renovation work.

Faster Route Onto the Property Ladder

For first-time buyers struggling to save while paying rent, these mortgages offered a quicker route into home ownership.

Single Finance Arrangement

Borrowers could often arrange both the mortgage and additional borrowing through one lender rather than taking out separate loans.

Disadvantages of 125% Mortgages

Despite their attractions, these mortgages carried significant risks.

Immediate Negative Equity Risk

Because borrowers started with debt exceeding the property's value, even a small fall in house prices could leave them in negative equity.

Higher Interest Rates

High loan-to-value borrowing generally comes with higher interest rates and increased monthly repayments.

Greater Financial Risk

Borrowing more than a property's value leaves less room for financial setbacks, changes in income, or fluctuations in the housing market.

Limited Availability

Very few lenders are prepared to offer this level of borrowing today due to the increased risk involved.

Who Might Consider an Alternative?

Borrowers who would previously have looked at a 125% mortgage may now wish to explore alternatives such as:

• 95% mortgage products.
• 100% mortgages where available.
• Family-assisted mortgages.
• Guarantor mortgages.
• Shared ownership schemes.
• Government-backed home ownership initiatives.

An experienced mortgage adviser can help identify which options may be available based on your circumstances and affordability.

Should You Consider a 125% Mortgage?

For most borrowers, traditional 125% mortgages are no longer a realistic option. While a small number of specialist lending solutions may occasionally emerge, mainstream lenders generally favour lower-risk borrowing and require evidence that applicants can comfortably afford their repayments.

If you have little or no deposit, it is worth exploring the range of alternative mortgage products now available. The mortgage market has evolved considerably since the financial crisis, and there may be options that help you buy a home without taking on the level of risk associated with the 125% mortgages of the past.

Need Mortgage Advice?

Mortgage criteria and product availability can change regularly. If you're looking to buy a property with a small deposit, or would like to explore alternatives to a traditional 125% mortgage, speak to a qualified mortgage adviser who can assess your circumstances and help identify suitable options.