The pros and cons of 100% mortgages

For those of us that own property and are planning to move the equity from our old property will hopefully cover the cost of any deposit and other costs associated with moving home. However, for first time buyers the situation can prove far more difficult, as there is no previous property from which to use equity, and therefore any upfront costs must come from the buyer's own pocket.

The upfront costs needed as a first time buyer can really mount up. You have to take into consideration everything from solicitor fees and valuation fees to buying furniture for the home, and of course the money needed for a deposit. These costs, not including the deposit, can already run into thousands of pounds, and for many first time buyers with no substantial savings put aside the prospect of being able to afford to get on the property ladder is a very bleak one.

However, one thing that might be able to help first time buyers that cannot afford to raise a deposit on top of all the other costs is a 100% mortgage. A number of lenders offer 100% mortgages to first time buyers, and as the name suggests these mortgage work by offering the buyer a 100% loan to value mortgage – which basically means that you borrow the full value of the property rather than putting down the standard 5% deposit and borrowing 95% of the property value by way of a mortgage.

With all of the other costs to take into consideration this type of mortgage provides a lifeline for many first time buyers that are anxious to get onto the property ladder. Of course, in an ideal world, it would be nice to put down as large a deposit as possible so that you are taking out a smaller mortgage, but with house prices so high at present very few first time buyers are able to raise such a large deposit, with even 5% equating to thousands and thousands of pounds.

With a 100% mortgage a first time buyer does not have to worry about putting down a deposit, although the costs such as legal fees and valuation fees will still need to be budgeted for. However, although many first time buyers consider taking out this type of mortgage to enable them to get their foot on the property ladder it is very important to also consider the risks.

The main risk of a 100% mortgage is that you could quickly fall into negative equity if house prices fall. Remember, you will have no equity at all in your home having taken out a loan for the full value of the property, and therefore if property prices fall before you have made a dent in your mortgage balance you could end up owing more on the property than your property is actually worth. Another thing to consider is that your monthly repayments are going to be higher, and if you start struggling and missing out on payments you could soon find yourself being threatened with repossession.

If you are happy to consider taking out a 100% mortgage you need to make sure that you compare mortgages from a range of lenders to find the most competitive and suitable deal, as this will help to keep costs down.

Tom Smith
29th January 2008

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