100 Percent Mortgage

Negative Equity Danger

Negative equity refers to the situation whereby the mortgage amount is higher than the value of the property, i.e. there is less than £0 in equity in the property.

The closer an individual borrower is to the 100% value of the property, the more susceptible they are to falling into a negative equity situation. Anyone who has already borrowed the full 100% could find that the slightest fluctuation in house prices would have a dramatic impact.

For example, if someone borrows £180,000 which is the entire value of the property and house prices (or rather specifically this one property) drops by just 2%, the borrower would have to find an additional £3,600 simply to repay the mortgage, if they were to sell their property. Of course this isn’t actually a problem if the need to sell does not arise when there is a negative equity situation.

The real danger with negative equity comes when the borrowers are stretching themselves to the limit in terms of the amount of borrowing that they are taking on. With so many first-time buyers struggling to enter the market, buyers are often faced with having to take mortgages for over four times their salaries. If interest rates suddenly rise, or there is a change in circumstances, home owners may find themselves in a position whereby they can no longer afford the monthly payments and are forced into selling their property. If a mortgage of more than the value of the property remains outstanding, this could result in the owner either not being able to afford to sell or having to sell at a loss, leaving them with outstanding debts thus preventing them from re-entering the housing market.

Other Issues

Lenders offering mortgages of 100% or more are understandably more concerned about ensuring that they have adequate security in place, in the event of the borrower defaulting on the payments. It is common practice for lenders to split the ‘mortgage’ into a part that is secured on the property itself and another part that is unsecured. For example, take a borrower who is looking at a £200,000 house with a 100% mortgage. This borrower will, in fact, be offered a mortgage of approximately 90% (£180,000), which will be secured on the property and a further £20,000 which will be in the form of an unsecured loan.

It is well worth noting the split on your 100% mortgage as this will enable you to work out the best deal for your individual circumstances. The larger the amount of the loan that is secured on your property, the greater the risk that you may find yourself in a position where the amount that you sell the property for will not cover the mortgage repayment. A lender is generally thought to be able to recover any debt on a mortgage that remains outstanding for a period of twelve years, as opposed to six years with a standard unsecured debt.