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Advantages and Disadvantages of 100% Mortgages

In this day and age of rising costs and low housing affordability, various schemes have arisen to assist first-time-buyers get onto the property ladder. One is these is 100% mortgages, which provide enough funds to the borrower to purchase a property outright.

This eliminates the need for a deposit as 100% of the property's purchase cost is funded by the lender by way of repayment mortgages a mortgage. Essentially 100% of the value of the property is mortgaged, leaving no equity in the property on the date that it is purchased.

The main benefit of 100% mortgages is that the borrower will not be required to put down a deposit. This can allow people with only a small amount of savings, such as first-time buyers, the opportunity to get a foot on the property ladder.

Instead, any savings that have been repayment mortgages accumulated can be used to pay for purchasing costs such as legal fees, stamp duty, and mortgage application and brokerage fees. Any remaining funds can be saved for furnishing and fitting out the property and to keep aside as an emergency fund.

While the prospect of not having to fund a deposit may be attractive, 100% mortgages have several terms and conditions that mortgages of lower Loan-to-Value (LTV) ratios do repayment mortgages not.

These include a higher interest rate, a higher loan balance resulting in more interest to pay, a limited number of lenders to choose from, stricter lending criteria, tie-ins and early repayment charges, and mortgage Indemnity Guarantees (MIG) or Higher Lending Charges (HLC).

In addition to these extra terms and conditions, 100% mortgages also enhance the risk of negative equity. Negative equity occurs when the value repayment mortgages of a property is less than the balance of all finance, such as mortgages and secured loans, held over it. A decline in the value of the property below this balance will result in negative equity.

Despite the disadvantages, 100% mortgages have become popular in recent years due to rapidly increasing property prices and the inability of first-time-buyers to save for the deposit necessary to apply for more traditional mortgage repayment mortgages products.

More recently, mortgages with LTVs higher than 100% have begun to emerge. These mortgages also provide cash-back funds to the borrower to help pay for purchasing costs such as stamp duty and legal fees.

While high LTV mortgages can provide a short-term solution for getting a foot on the property ladder, careful consideration should be given before applying for 100% mortgages, or higher, as they repayment mortgages can be risky.

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