Debt warning as the biggest lender offers 125pc mortgage

The new deal would plunge people instantly into a negative equity crisis, where the size of their mortgage is bigger than the value of their home.

Experts fear the new mortgage from HBOS, the banking giant, will encourage people to buy a home which they could struggle to afford.

To make matters worse, it comes in the week that mortgage costs are set to rise as the Bank of England is tipped to hike interest rates on Thursday.

The interest rate is currently 4.75 per cent, but it is predicted to rise to five per cent, and could go up again in the new year to a five-year high of 5.25 per cent.

The launch of the new 125 per cent mortgage will be a radical move for HBOS which controls 20 per cent of Britain's £1 trillion mortgage market.

It will be the highest 'LTV' (loan-to-value) available in Britain with only a handful of rival lenders offering the same 125 per cent deal.

These types of mortgage make it possible to buy a home, pay the stamp duty and buy some furniture without having saved a single penny.

At present, HBOS, which stands for Halifax Bank of Scotland, only offers 100 per cent mortgages with Bank of Scotland or 97 per cent with Halifax.

Yesterday a spokesman for the banking giant did not deny rumours about the launch which is expected to be unveiled shortly.

An HBOS spokesman said: "We never comment on speculation about what we may or may not be doing with our products in the future."

The move would be the latest attempt by lenders to help people to get onto the housing ladder after a decade of rampant property price inflation.

But it comes as official figures reveal a 22 per cent jump in the number of families at risk of losing their homes after missing mortgage payments.

Recent research showed soaring numbers of young people are taking out mortgages worth more than 100 per cent of their homes.

Top broker, Mortgage Advice Bureau, has seen a 70 per cent jump in the numbers taking out the controversial '100 per cent or more mortgages'.

Experts warn these home-buyers could be burdening themselves with 'dangerous levels of debt' which could plunge them into a negative equity crisis.

David Hollingworth, a mortgage specialist at advisers London & Country Mortgages, said: "If you are taking a 100 per cent or more mortgage, you are starting off in a position that you are already in negative equity, or facing negative equity if prices drop.

"If you are going to do it, it is not to be done lightly."

If property prices keep on rising, these mortgages are a clever way of getting onto the housing ladder and watching your new home shoot up in value.

But experts warn property prices have been rising for 11 years and are not guaranteed to keep on going up.

If they are forced to sell their home, they will be left homeless and owing a huge amount of money to a bank or building society.

They are not just popular with first-time buyers, but also divorcees in their 40s who have left the family home and have no savings to buy a new property.

Andrew Hagger from the research firm Moneyfacts said: "I think people who are choosing these types of mortgages are taking on dangerous levels of debt.

"I would not recommend anyone to take one out because it is a very high risk strategy.

"How long are they going to have to wait before the value of their home catches up with the size of their mortgage?"

The new deal will compete with the popular 'Together' mortgage from rival mortgage giant, Northern Rock, launched in 1999.

It allows people to borrow up to 125 per cent of the value of their home, which is a mixture of a mortgage secured on the home and an unsecured loan of up to £30,000.

The average first-time buyer pays about £152,000 to buy a home, according to the latest Government figures.

With a 125 per cent mortgage, this would mean they would borrow about £190,000 from the bank. If they took out a fixed mortgage at five per cent, their monthly repayments would be more than £1,100.

It would take about two years before they were no longer in a negative equity situation, assuming house prices rise at an inflation-busting 11.5 per cent a year.

Although this is the average annual rise over the last decade, it has been an extraordinary period and one that is unlikely to be repeated.

It comes as Abbey last week started lending mortgage worth five times a person's salary, a huge jump from the traditional three times.

If you are earning £60,000, or a couple earns £30,000 each, this means you could borrow a massive £300,000 mortgage.

For low risk customers with a good credit history, the banking giant said it is even prepared to stretch to seven times their salary.