100 Percent Mortgage

100% No Longer Provided!
100% Mortgages are no longer available. Available options similar to this type of discontinued product are ‘Minimum 10% Deposit’ and ‘Shared Equity Mortgages’.

If you would like to inquire about either a minimum 10% or a shared equity mortgage click on the FREE QUOTE button.


Negative Equity Danger

A similar difficulty arises with negative equity, which is effectively the position in which anyone borrowing more than 100% immediately places themselves. 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.

However, the interest rate and, therefore, the cost of an unsecured loan, is considerably higher than for a secured loan. Indeed, the monthly payments will be much higher if the unsecured loan part of the mortgage is increased. On the plus side, if it becomes necessary to sell the property, the mortgage can be paid off and the loan will simply have to be carried forward and paid off over time. Although this is not ideal, it does prevent a borrower becoming effectively ‘locked’ by negative equity.

When obtaining a 100% mortgage there may also be additional issues such as a more detailed survey that the lender will require to ensure that they have suitable security for the value of the mortgage. The cost of this survey will almost always be borne by the borrower. Therefore, any of these additional up-front costs should be taken into account when considering the deals available.

Alternatives to 100% mortgages

As already suggested, 100% mortgages are normally made up of a secured part and an unsecured loan. There is absolutely nothing stopping a borrower from obtaining the mortgage element from a standard lender. This would enable the borrower to take advantage of the deals that are available to those taking out mortgages of a lower loan to value ratio and then topping up with an entirely independent unsecured loan. This gives the borrower the flexibility to create their own 100% mortgage, thus taking advantage of any better or more flexible deals that may be available.

Conclusion

100% mortgages are becoming increasingly necessary to assist first time buyers into the housing market. House prices are increasing at such a rapid rate that many first-time buyers simply do not have the time or resources to save a 10% deposit, before purchasing. By offering these larger mortgages, lenders can continue to attract new borrowers.

However, these mortgages are not without risk. 100% mortgages are, typically, more expensive than comparable lower ratio mortgages and there are often additional costs involved such as more extensive surveys. Similarly, the danger of entering a negative equity situation is considerably higher and contingency plans should be put in place prior to entering into this type of borrowing.