The grim spectre of negative equity  is rearing its ugly head again as thousands of borrowers take out new, bigger loans...

In part, the trend is being driven by leading lenders luring first-time buyers with offers of loans worth anything from 100 to 125% of the price of a house.

Earlier this month, Abbey launched a mortgage aimed at first-time buyers where it would lend the full value of the property at a rate of 6.99%.

Rivals Alliance & Leicester, Northern Rock and Coventry Building Society already offer such deals. Some lenders, such as A&L, offer a mix of debt in the form of a mortgage and a personal loan that can take the total owed up to 125 per cent of a property's value.

In other words, a first-time buyer purchasing a property for the average of £152,000 could borrow as much as £190,000. Until they paid off some of the mortgage, or unless the property's value went up, buyers would be in negative equity.

Gamble sometimes pays off

Yorkshire Building Society, the latest big lender to enter the fray, is expected to announce a 100 per cent-plus mortgage deal this week.

For some borrowers, the gamble of borrowing to buy a home with no deposit has paid off (see report, left). But with economists virtually unanimous in predicting both a rise in interest rates and a slowdown in house prices, the risks have never been higher.

Even the Council of Mortgage Lenders, which represents the interests of banks and building societies rather than their customers, has warned that interest rate payments for first-time buyers are at a 15-year high.

But cash-strapped first-timers are not the only homeowners in negative equity. Older borrowers with hefty credit card and other expensive debts are being targeted by lenders offering to roll all the debt into one giant loan worth anything up to 125% of the price of their property.

Julia Dallimore of one such lender, Picture Financial, says that in many cases borrowers benefit from an overall reduction in the cost of their interest payments.

'We are not encouraging borrowers to spend more or borrow more,' she says. 'By the time they have come to us, the money has already been spent. We simply make the debt easier to afford.'

Feared and hated

Picture Financial, one of dozens of companies advertising loans of up to 125% of property values, says it will not lend where borrowers' total repayments exceed 45% of their take-home pay.

Its borrowers are not typically in arrears when they apply, says Dallimore. They are middle-class earners whose spending habits have left them with debts that now 'cramp their style'.

Negative equity was a feared and hated feature of the Nineties housing crash when at one point 1,500 properties were being repossessed every week.

Dallimore admits that today, negative equity appears to be viewed differently. 'People have become more comfortable with debt,' she says. 'Also, this is a different scenario as the negative equity has arisen through money that has been spent rather than through a fall in the value of homes.'

The growing popularity of interest only mortgages, where borrowers service debt but do not make any capital repayments, does not help homeowners to build up equity in their properties.

According to the Financial Services Authority, six per cent of people say they are struggling to meet interest payments. That number, based on research undertaken last year, is expected to have grown as rates have risen.

Source: http://www.thisismoney.com