100% mortgages have become more popular in recent years for several reasons:
- Rising house prices means that it is more difficult to save up a suitable deposit.
- Rapid rise of house prices – If you saved £3,000 a year towards a deposit, you may find that house prices have risen by £10,000, meaning that you are still far away from actually buying a house.
- It was felt that in an era of rising house prices your 100% mortgage would soon become a 95% mortgage, because the rise in house prices would effectively give you a deposit.
- Banks were more willing to give 100% mortgages.
Dangers of 100% Mortgages.
The main problem of a 100% mortgages is in a period of falling house prices. basically this means that the house is worth less than your mortgage. If a £200,000 house fell by 10%. The house value would now be £180,000, but, your mortgage debt would be £200,000. This is a real problem for those who wanted to sell their house. It could mean that people with 100% mortgages are tied to their house for many years until house prices recover.
Do Falling House Prices increase the Risk of Defaulting.
For those with 100% mortgages a fall in house prices is bad news, but, it doesn’t increase the actual cost of the mortgages. Therefore, a fall in house prices, doesn’t actually increase the chance of mortgage defaults. In fact, a fall in house prices will probably enable interest rates to fall. Therefore, this will make your mortgage payments cheaper.
Should I get a 100% mortgage deal?
- It is better if you can save a deposit of 5%. This will probably enable a better interest rate. 100% mortgages tend to be more expensive.
- House prices may not fall. People have been predicting their imminent collapse for the past 5 years.
- If you are happy to stay in the house for several years, negative equity is not so damaging. However, it would prevent remortgaging for equity withdrawal.
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