A Guide To 100% Mortgages
Author: Michael Sterios
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 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 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 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 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 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 can be risky.
If a borrower cannot keep up with their mortgage repayments
their lender may repossess their home. The lender will sell the
property and use the sale proceeds to pay off as much of the
loan balance and mortgage arrears as possible. If there is a
shortfall then the borrower will be liable to pay for it despite
the fact they no longer own the property.
The risk of a shortfall is greatly increased if the mortgage
funds borrowed equal 100% or more of the value of the property.
Home owners should therefore be aware that this type of mortgage
does expose them to a high risk of shortfall if their home is
repossessed and sold.
As with all loans, the key to success is for borrowers to
ensure that they don't borrow any more than they can afford to
repay.
About The Author: Michael Sterios is a writer for
http://www.ukmortgagesource.co
