With a 100% mortgage, the lender provides the entire purchase cost of the house and there is no need to pay a deposit. With house prices having risen so sharply in recent years, the 100% mortgage has become increasingly popular. For borrowers a 100% mortgage offers greater opportunity to buy their first home or to upgrade and purchase a more expensive home. Lenders offer the 100% mortgage in order to attract a greater number of home buyers to use their services.
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No Deposit Needed
The appeal of a 100% mortgage is immediately obvious. House prices have been rising markedly for some years making it more difficult to get that first foot on the property ladder. With a 100% mortgage, buyers that cannot afford a 5% or 10% deposit but have good credit are still able to purchase a new home.
Higher Interest Rates
100% mortgages typically attract higher interest rates, because the lender is put at greater risk that your property will fall into negative equity. To allay this fear, lenders may add a mortgage indemnity guarantee to the total price of your mortgage. This fee is usually incorporated into the monthly mortgage repayment, although some lenders may ask for a lump sum payment at the beginning of the mortgage.
Negative equity occurs when the borrower owes more for their mortgage than the current value of the house. Buying a property with a 100% mortgage puts you at greater risk of this occurring, and should house prices fall then it is a very likely outcome. You should try to get the best deal available on your property and your mortgage while attempting to complete the purchase at the right time, so that your property value does not decrease immediately on completion.