100% Mortgage

100% mortgages have increased hugely in popularity over the recent years, mainly because of continually rising house prices. For buyers who have been unable to save a deposit, the 100% mortgage has enabled them to get their foot on the ladder.

What is a 100% Mortgage?

A 100% mortgage is simply a mortgage where the lender will provide the total cost of the property to be purchased.

Normally, mortgage providers will only lend you a certain percentage of the property value and the maximum percentage a mortgage lender will usually provide is between 75% and 95%.

If the house costs £150,000, a 75% mortgage means you borrow £112,500 and will need to find a deposit of £37,500. The cost of the property is determined by the lower of either the purchase price or value of the property.

100% mortgage loans are inherently high risk for mortgage providers as it is harder for them to recoup their money in the event the borrower defaults and they need to repossess the property. In this event, properties are generally sold at a discounted price in order to achieve a quick sale. Secondly, if property prices drop, the value of the property may no longer be enough to repay the loan. It is for these reasons that mortgage lenders levy a higher interest rate for 100% mortgages to mitigate these risks.

Some lenders may also charge a Higher Lending Charge [HLC] for high risk loans such as 100% mortgages. This can be quite significant as HLC fees are typcially charged at up to 8% of the amount of the lenders' standard lending threshold.

For example, if a lenders' standard lending threshold is 75%, a 100% loan of £200,000 might have an HLC premium of £4,000 (£50,000 x 8%).

Such HLC premiums may be paid as a 'one off' or added to the mortgage advance and some lenders make a point of not charging HLCs.

A factor important factor to consider regarding 100% mortgages is the risk of negative equity. This occurs when, for example, property prices decrease and the outstanding balance of the mortgage becomes greater than the value of the property. In this event, the property is no longer sufficient to repay the loan and so it becomes very difficult to exit the mortgage or move house without additional funds.

Advantages of 100% Mortgages

• The primary benefit of a 100% mortgage is that it enables those who have been unable to save a deposit to get on the property ladder
• Most lenders will require a deposit of 20-30% of the property value so a 100% mortgage will enable you to buy the property much sooner
• Some lenders allow the arrangement fee to be added to the balance of the mortgage

Disadvantages of 100% Mortgages

• 100% mortgages usually have a higher interest rate associated with them. This is because of the greater level of risk to the mortgage provider
• To help mitigate the risk, some lenders will take an insurance policy to protect themselves should they not be able to recover their money. The premiums of this policy, called a Higher Lending Charge [HLC] may be payable by you
• There is a much greater risk of negative equity which would mean that should property values drop and the outstanding balance of the mortgage becomes greater than the value of the property, you would be unable to sell without using additional funds

Advice when choosing a 100% mortgage

• Whilst a 100% mortgage will cover the total cost of the property, there are still fees you will need to pay such as legal fees, a valuation fee, stamp duty and an arrangement fee.
• You you have managed to save a deposit, it is strongly recommended that you try to use this towards the mortgage as it will save money in the long term
• Shop around to see who is offering the best interest rate as these frequently vary
• Bear in mind that some mortgages charge a Higher Lending Charge whilst others do not. Make sure you take this into account working out the total cost. Sometimes it may be more cost effective to take a higher interest rate if it means avoiding a huge Higher Lending Charge

For more information about '100 Percent Mortgages', you can call us on 020 8783 1337 or submit an online quote.