100% Mortgages

What are they?

A 100% mortgage is a mortgage where 100% of the value of the property to be purchased is borrowed. In other words, the purchaser is loaned 100% of the property value. By way of example, if a house costs £200,000, a 100% mortgage would be £200,000.

In general, the bigger the deposit that is placed on a property, the better the mortgage terms. Deposits of 10%, or more, facilitate access to lower interest rates. 10% deposits also offer the flexibility of lower monthly loan repayments, or even a shorter mortgage term.

The problems with getting a 100% mortgage are:

• It will probably cost more than an 80% or 90% mortgage due to a higher rate of interest being charged

• The borrower may get tied in to the mortgage deal with heavy early redemption penalties

• If property values fall rather than rise, then borrowers will find themselves in a state of negative equity. In other words, the property will be worth less than the loan covering it

• A mortgage indemnity guarantee policy may have to be taken out at extra cost

For many first time borrowers a 100% mortgage is the only option.

Credit crunch

Due to the “credit crunch” 100% mortgages are few and far between. Borrowers will be charged a larger “higher lending charge” (HLC)) premium than if they put some of their own cash towards the purchase price.

The end of an era?

Banks profits have taken a serious hit in the aftermath of the sub-prime mortgage fiasco. Up until recently, mortgage lenders had been doing business on small profit margins due to intense competition in the marketplace. Things have changed. Competition has fallen away.

Mortgages are harder to come by

Now mortgages are harder to come by, and many borrowers are having to settle for higher lending rates. So even though it is now costing banks and building societies more to borrow money, they are charging more than they used to lend it out. Profit margins per loan have risen considerably from 0.25% to anything up to 1%.

Escalating arrangement fees

Arrangement fees that are charged to set up new mortgages are also rising. Some lenders are now even charging arrangement fees to take out standard variable rate mortgages, something that was unheard until recently.

Reverting to the mean

Many experts agree that the housing market is now ‘reverting to the mean’ after a long period continuous growth. Credit has been extremely cheap in recent times, and this has fuelled runaway escalation of property values. The rate of growth was unsustainable, and now the market is reaping the consequences. It is hard to predict just how far property prices will drop until the point of market readjustment is reached.