100 Percent Mortgage

One of the main criticisms of the 100% mortgage has been the higher lending charges that many lenders levy on borrowers at this higher rate. A recent survey by buy to let market suggested that in 2007 a total of £220 million would be paid out by borrowers in unnecessary higher lending charges.

Given the increasing number of borrowers opting for a 100% mortgage, it is not surprising that figures suggest that around 110,000 borrowers will have to pay these charges. On average, these charges are approximately £2,000 per borrower.

Crucially, some mortgage lenders offer borrowers the opportunity to pay the higher lending charge upfront as part of the fees paid. In reality, this is not something that most borrowers can manage as they are also facing the costs of stamp duty, legal fees and other mortgage arrangement fees. Consequently, the higher lending fees simply get rolled into the mortgage amount.

With an average cost of £2,000, when it is added to an average rate mortgage, this would actually amount to the borrower paying a total of £4,300 over the life of a mortgage.

Currently, it is estimated that stamp duty and higher lending charges on the average first-time buyer purchase amount to £5,500. Although the Chancellor recently raised the standard stamp duty level to £125,000, this does not assist many of the first-time buyers who are paying far in excess of this amount. Stamp duty levels have simply not risen at the same rate as the price of housing, pushing first-time buyers further and further into debt.

Of course, first-time buyers are not the only ones to be affected by the 100% mortgage. In theory, 100% mortgages are open to other, second-time buyers who can be just as badly affected by these higher rates. The average house price is now set at over £175,000 and it has been estimated that if the stamp duty threshold had risen at the same rate as housing costs, it would now sit at £210,000.

Different mortgage providers have different costs associated with higher lending charges. In most cases, the higher lending charges begin at around 75%. As at the first quarter of 2007, the mortgage rates for those requiring loans of between 75% and 95% loan to value start, for example, at around 7.25% with Halifax and 8.95% with the Royal Bank of Scotland.

The higher lending charge, in almost all circumstances, rises substantially for those who require over 95% loan to value. Generally, these rates of interest will hit nearly 10%, showing that failing to have even a small deposit will have a dramatic impact on the cost of the mortgage to the borrower.

As well as the cost of a 100% mortgage, it is also common practice for the lender to put a long lock-in period on the mortgage, meaning that the borrower cannot leave their current lender to find a cheaper deal for an onerously long period of time.