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100% mortgages and 100 per cent mortgages

Many first time buyers or second-time buyers who can easily afford mortgage repayments are unable to scrape together the money for a deposit. However, if you’re in this tricky position, you could still buy with a 100% mortgage. This type of mortgage is now widely available. Some lenders cover the price of the property in its entirety with a 100 per cent mortgage plus a bit more to cover fees, stamp duty, moving costs and so on, all of which can be added onto the loan repayments.

COSTS AND CHARGES FOR 100% MORTGAGE

In view of the increased risk being taken on by the lender, rates and penalties are high for 100 percent mortgages.

Interest rates: You cannot expect the cheapest rates on a 100% mortage loan so there’s little point in looking at best buy tables and expecting to get a competitive rate. With low all-round rates, 100% morgage loans are not bad but you might expect to pay 0.5% or 1% more than if you had a deposit. The rate could either be variable or fixed, although tracker and discounted rates are also available to help bring down initial costs. mortgage calculator

Arrangement fees: Surprisingly, arrangement fees are no higher than with fixed or discounted rates, for example.
 
HLCs: Where you will feel the fees, however, is with the Higher Lending Charge (HLC), which many lenders – though not all – charge on loans above 90% loan-to-value (LTV). This fee is the lender’s protection should you default on the loan – something you are, in theory, more likely to do the larger the loan is. As a borrower, you don’t get any benefit from HLCs – you simply have to pay up – and as it is a percentage of the loan, this can run into thousands of pounds. You can add the cost to your mortgage but this can be very expensive, as you will pay interest on it for the life of the loan. It’s possible to avoid HLCs if you shop around but be wary of where else you are paying to compensate for this.
 
Redemption charges: Early repayment charges (ERCs) on a 100% mortgage won’t necessarily be any harsher than for standard loans but with a higher loan, they will cost you more if you try to remortgage before the tie-in period is up.

Affordability: Having a 100% mortgage does make you vulnerable to fluctuations in the housing market. If prices were to drop suddenly in your area, selling your property may not generate enough money to repay your mortgage and you could find yourself in negative equity. This is only something to be afraid of, however, if you decide or are forced to sell. As long as you can afford your mortgage repayments, it doesn’t matter what your property is worth because you are still paying off your long-term debt. It is more important to make sure you can cope with a rise in interest rates than a fall in house prices. This is why 100% mortgages are not suitable for people who only want to stay in that property for a short time.

ADVANTAGES OF 100 PER CENT MORTGAGES

A house is probably the largest purchase most of us will ever make and taking on a 100% mortgage is a serious commitment. However, they allow you to get onto the property ladder without a deposit, invest in the market more quickly than if you were waiting to save for one, use your savings to meet other home buying costs and when prices are increasing you will be better off financially and can switch to a lower rate. 100% mortgages can help you buy a home without a deposit
 
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Source: Mortgage Advisor & Home Buyer magazine