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100% mortgages

explained

Before 100% mortgages came along, those struggling to get onto the property market for the first time found that the costs associated with buying a property often prevent them from achieving their goal. The first major obstacle is the deposit. The average student leaves university saddled with over £8,000 of debt these days, often much more. This means that assuming they land a decent job and can save £500 a month (unlikely!) it will be over 1 and a quarter years before they can pay their debts of and start saving towards a mortgage deposit.

Once legal fees, land search fees, mortgage set up and valuation fees are added the initial fees encountered when trying to buy a house soon mount up. 100% mortgages aim to solve this by loaning the buyer 100% of the house value. In other words a 100% mortgage removes the need for the buyer to have a deposit.

The lack of dependence on a deposit may help prevent some people trying to get deposit money together by taking out more expensive personal loans or even borrowing on credit cards (one of the most expensive forms of debt). As a result to those with a good income, but minimal or no savings 100% mortgages offer a great way to get onto the property ladder.

However potential home owners should take care. These loans often prove much more expensive than traditional mortgage loans as the mortgage lender requires a premium for the extra risk they are taking on by lending you the full value of the property. The effect of this is that you will end up paying a higher interest rate for a 100% mortgage than a traditional mortgage.

Beware of negative equity

If house prices fall, as they are currently threatening to, you can quickly end up in negative equity. This is the situation where you have a mortgage on a property that is greater than the value of the property itself. This may not be a problem until you come to sell the property when you will have to pay back the mortgage in full but will not receive enough in sale proceeds to do so.

All in all 100% mortgage are a perfectly good option if you have a secure and large monthly income and minimal savings. However in times of house price uncertainty these type of loans should be researched heavily as the threat of negative equity is much greater than with a traditional mortgage.