Mortgage lenders are set to stop selling 125 per cent home loans in a move which could leave thousands of homeowners in dire straits.

The fallout from the credit crunch and stalling house prices have forced three high street lenders to stop offering 125 per cent deals which were popular among home buyers, especially first-time buyers, when house prices were rising.

Alliance & Leicester is set to stop selling its PlusMortgage range of home loans from tomorrow while Abbey will end the pilot scheme it launched for 125 per cent deals on Friday. Coventry Building Society and Godiva Mortgages will also stop selling the mortgages this week, The Times has learnt.

Many buyers signed up for the deals confident that rises in house prices would help them to pay off the large loan. But these homeowners will now struggle to get a similar mortgage when their short-term fixed-rate deals come to an end. Some could even face losing their homes if their application is turned down by one of the three other lenders still offering the deals.

The 125 per cent deals usually offer up to 95 per cent of the value of the home as a traditional mortgage, plus another 30 per cent as an unsecured personal loan.

However Abbey offers a mortgage of up to 100 per cent loan to value plus an additional secured loan of £25,000, working out as a 125 per cent home loan for those who have a house worth £100,000 or less. Abbey launched its pilot scheme in September 2007, just before the credit crunch hit lenders in the UK.

Stephen Leonard, the Director of Mortgages at Alliance & Leicester, said: “Alliance & Leicester is a prudent and responsible lender with PlusMortgage successfully targeting high quality applicants. However, we keep our product range under constant review and given current market conditions, we will be withdrawing our PlusMortgage products at this time.”

Julia Harris, of Moneyfacts, the financial information website, said: "Alliance & Leicester's move is just another example of institutions tightening up their lending."

Alliance & Leicester charges 7.14 per cent on its 2-year fixed 125% loan, and 7.34 per cent on its 3-year deal.

This week, Bank of Scotland withdrew all of its 100 per cent mortgages from the market.

Northern Rock is still offering its 125 per cent Together Mortgage, but experts say that the bank has effectively priced itself out of the market by charging more than 8.2 per cent on its 2-year fixed-rate deal, nearly three percentage points more than the base rate.

A borrower with a £125,000 mortgage with A&L would see repayments rise by nearly £100 a month if they switched to Northern Rock's deal. There is no guarantee of how long Northern Rock will continue to offer such a deal.