Published: 26/02/2008

As the credit crunch tightens its grip, one of the most telling signs of what's to come can be found in the mortgage market. With lenders increasingly turning the screw and tightening their lending criteria many borrowers will be left high and dry with expensive and inflexible mortgage deals.

Over recent years a number of lenders have been promoting mortgages to First Time Buyers that have enabled them to borrow more than 100% of the property value. These mortgages usually work by offering a mortgage on the property of 95% and then providing an unsecured loan for a further 30% of the property value meaning that the borrower ends up with total borrowing of 125% of the property value.

Whilst these deals have helped thousands of first time buyers get on the housing ladder they are also partly to blame for pushing up house prices and maintaining the first time buyer market which might otherwise have helped to restrain the massive price increases we've seen.

We have always questioned the sanity of borrowing 125% of the property value and felt that this was a disaster waiting to happen. Not only are interest rates loaded to reflect the higher risk the lender faces but the purchaser also has no stake in the property meaning they are particularly vulnerable to any reduction in house prices. It's a sad fact that those borrowers who have completed a 125% mortgage in recent months could find themselves in the unenviable situation of seeing their negative equity (where the mortgage is greater than the property value) increasing month by month. If house prices really do fall significantly then it will be no surprise if many of these borrowers throw in the towel and hand back the keys to their lender leaving them without access to credit and with the prospect of being hounded for the outstanding debt for years to come. It's a shame that lenders appear to have learnt nothing from the last property crash which saw thousands of borrowers handing back their keys or being repossessed by their lenders.

However, as a further sign that the 'credit crunch' is really starting to bite we are now seeing most lenders withdrawing these products due to 'market conditions'. Lenders are obviously concerned about the potential for these mortgages to turn bad now that house prices are looking so unstable although they could well be shutting the stable door after the horse has bolted. Prices in many areas are already showing reductions and any action by lenders that effectively unsettles the market or cuts off access to mortgages for a large section of consumers can only exacerbate the situation and add to the downward pressure on prices.

In a further twist Northern Rock are in the process of writing to a large number of their borrowers suggesting that they move their mortgage to a different lender when their fixed rate comes to an end. They are suggesting that they are unable to offer any attractive deals and that if the mortgage is not moved then the interest rate will shoot up to their standard variable rate of 7.59%. It's not clear at this stage whether they are writing to all borrowers who are coming to the end of a fixed rate or just those they consider to be high risk which could be for a variety of reasons. They may have an unusually large mortgage, not be able to prove their income or have had some history of adverse credit in the past. Whatever, the reason it's likely that a significant number of these borrowers may find it difficult, if not impossible, to remortgage elsewhere as a result of other lenders also tightening their lending criteria. This means they will effectively be left stranded with Northern Rock at uncompetitive rates of interest. For someone coming off a fixed rate at 5.19% and going to the variable rate at 7.59% they will see an increase in their monthly repayments of nearly 50%!

So, what can you do if you find yourself in this position? Well, we are not going to pretend there are any easy answers. For many the uncomfortable fact is that there is very little that can be done. However, for others there are a few simple steps that could be taken to alleviate the situation. Here are a few simple tips;

1. Act Now - Don't delay - It's our prediction that the mortgage and loan market will tighten further before it gets better. This means that deals may become even more difficult to get so the faster you do something the more likely you will be to find a solution. If you are coming to the end of your current mortgage deal at any time in the next 6 -7 months then start looking for a new deal now. Lenders will usually keep a mortgage offer open for up to 6 months to tie in with the end of your current deal.
   
    
2. Increase your payments - This may sound odd but if you are in negative equity and you have any spare cash then increasing your monthly repayments will help you to clear the debt quicker meaning that you reduce the amount of negative equity.
   
    
3. Pay Interest Only - If you're really struggling with your monthly repayments then you can ask your lender to transfer your mortgage to interest only. Whilst this means that you are not clearing any of the debt it is preferable to going into arrears and enables you to maintain a good payment record. However, remember that as soon as you can afford it to switch back to capital and interest so you start clearing the debt again.
   
    
4. Extend the Mortgage Term - Extending the mortgage term has a similar effect to paying interest only. It will reduce the amount of capital you are repaying each month but reduce your monthly payments.
   
    
5. Consider letting the property - If you have somewhere else to live such as parents or relatives then you could consider letting the property which will help you to maintain the mortgage repayments until things improve. Talk to a reputable letting agent or solicitor who can advise you on the steps to take.
   
    
6. Talk to a Financial Adviser - Financial Advisers can often come up with solutions you haven't thought of and may be able to help you see things more clearly.
   
    
7. Talk to Citizens Advice http://www.citizensadvice.org.uk or the Consumer Credit Counselling Service http://www.cccs.co.uk. These are free charitable organisations who can talk through all your options.
    

DON'T;
 

• Hand back your keys to your lender
   
• Stop paying your mortgage
   
• Do Nothing