A 100% mortgage is mortgage where you borrow the full cost of the house. Usually lenders require you a deposit of say 10% and then lend you 90% of the full cost of the house. 100% mortgages are good for those without any savings but are keen to get on the property ladder. Usually 100% mortgages involve a higher interest payments as there is a slightly higher risk associated with getting a 100% mortgage. With a 100% mortgage some lenders may require you to get “Mortgage Indemnity Insurance” This is an additional charge to act as insurance for possible future deferment on payment.
Advantages of 100% mortgages
1. It enables people to buy a house without a deposit, so they don’t have to save several years for one.
2. You can use some of the mortgage loan to pay for the costs of moving and to buy new furniture e.t.c.
3. With rising prices in the UK 100% mortgages have become increasingly popular as the mortgage relatively soon becomes only 90% of the house value.
Disadvantage of 100% mortgages
1. It makes it more likely that a homeowner will experience negative equity. Negative equity occurs when the house value falls to below the mortgage. This means if you had to sell the house you would still end up owing money to the mortgage agent.
2. Although house prices are rising in the UK there is no guarantee that they will continue to rise. E.g in 1992 UK house prices fell substantially after the boom of the 1980s this meant that many who had just bought a house experienced negative equity.
3. Slightly higher mortgage interest payments than a conventional mortgage.
4. Will need to prove a relatively high income
A key feature is whether house prices will rise or fall.
Some mortgage lenders may be willing to lend more than the value of the house. These could be 110% mortgages or even 125% mortgages. This may be to enable the homeowner to spend on making improvements to the house. It is even more risky because if you sold the house you would still owe considerable some of money to the mortgage lender. 125% mortgages may be appropriate if a house is bought cheaply and has potential if money is spent on its renovation.
125% mortgages usually involve a combination of 95% mortgage and 30% conventional loan: Therefore it will attract a higher interest payment than a conventional mortgage