How a 100% Mortgage Could be Right for You

October 14, 2008

Buying a home comes with so much expense these days that buyers look for ways to cut down the costs. Monthly repayments can seem much more manageable than huge up front costs – said to average over £25,000 these days – so many people buy a house are tempted to increase their mortgage to cut down on initial expenses.

One way to do this is to take out a 100% mortgage, thereby negating the need for a deposit, which can be a great up-front saving.

A lender might change the criteria in assessing the loan of more than 95% of the property’s value. In these days of tightened lending criteria and the credit squeeze, this may well mean a higher interest rate. In the long term, therefore, 100% mortgages will cost more than lower loan-to-value mortgages, but waiting and waiting to save a deposit could mean that you wait “forever” to get on the property ladder. Your options to swap lenders or move in the early years may also be restricted by borrowing more than the purchase price.

If you do take out a 100% mortgage, you will have no equity in your property. This means that if your property falls in value, you will be in a situation of negative equity – you will owe more on your loan than your property is worth, and at some stage your original loan will still need to be repaid.

Of course, over the long term the value of property tends to go up, and over the course of a full mortgage term – 25 years – there is little doubt that the value of your property will rise above the amount of the loan. However, you will probably want to move before that time (not many people stay in a single property for 25 years these days) and when you do move a dip in house prices might take you into negative territory.

Some lenders offer even more than 100%, as there may be circumstances where you need or wish to borrow more than the value of the property to cover other costs associated with buying a house. For example the Abbey has a 100% Plus Mortgage in which, in addition to 100% of the value of the property, you might be able to borrow up to a further £25,000 up to a maximum loan-to-value of 125%. The Abbey doesn’t mind what you actually use the money for. You may wish to consolidate your outstanding debts, renovate your new home or even buy a new car.

For 100% mortgages lenders will typically lend up to five times a single income or four times joint incomes. The figures will vary from lender to lender based on how much you earn and number of financial dependants. Your credit score is also crucial. In the best circumstances you will probably be able to borrow up to five times joint income, but this sort of deal is usually reserved for applicants with £100,000 of income and who can clearly demonstrate affordability and have a high credit score.

To get on the property ladder without having to save for a deposit 100% mortgages are ideal.

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