Should you opt for a 100% mortgage?

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by Kay Murchie

Over 30 lenders including HSBC and Natwest will lend some first-time buyers 100% of their purchase price, taking away the need to save for a deposit. The amount of borrowers taking out a 100% mortgage has more than doubled over the last year.

This figure is not surprising since student loans and high rents make it difficult for first-time buyers to save. However, first-time buyers with debts and no deposits are being advised to carefully consider the options before taking out the 100% mortgage.

There are 3 main concerns that borrowers need to consider when taking out a 100% mortgage:-

1. Negative Equity
If property prices fall slightly, borrowers with 100% mortgages loans may suddenly end up in negative equity. If you borrow more than 100% then you will end up in negative equity right from the start, with a house worth far less than what you originally borrowed.

By having little or no equity from day one could make it more difficult to climb the property ladder in the future. It is also worth noting that property owners in negative equity will still be responsible for the difference if the property is sold for less than the value of the mortgage.

2. Remortgages
Increasing property prices suggests that first-time buyers who signed up for a 100% deal many years ago should have adequate equity in their homes. When their initial fixed or discount rates expire, they can shop around for the best remortgage deal.

If property prices fail to rise as quickly as they have been, then homeowners may have to remortgage within the smaller 100% market when their initial deals end.

3. Interest Rates
You are charged premium rates for 100% mortgages so if you are able to put just a 5% deposit down, you could get a 2 year fixed rate at 5.49%. However, if you sign up for a 100% mortgage, the 2 year fixed rate could be set as high as 6.35%.
The gap between the rates could make quite a difference to monthly repayments so it is advisable to save a little money for a deposit.