100% Mortgages – Are They For You?

If you’re looking to buy a house, but don’t quite have enough capital to put down a minimum 5% deposit, it may be that you can apply for a 100% mortgage, also known as a no deposit mortgage. This is where you’re actually borrowing against the full cost of the property, as opposed to whatever’s left after you’ve put down a deposit. However, there are pros and cons to this approach, so you need to make sure you’re aware of what’s involved before you take one on.

The Pros

The obvious benefit of taking out a 100% mortgage is that you don’t have to come up with a hefty deposit to secure your property. This is particularly attractive to first-time buyers, especially in today’s housing market and the average price of a new home.

The other benefit is that 10% mortgages are available to people with less than perfect credit. Again, this offers an excellent way to get onto the property ladder even if you would normally be turned down elsewhere. Combine that with the lack of a deposit, and a 100% mortgage is one of the only ways that a lot of people can even consider buying a home. Yet with any benefits usually comes disadvantages, and this is certainly the case with these types of mortgage.

The Cons

Because the very nature of 100% mortgages mean that no deposit is required, and that you’re borrowing against the complete cost of the property, they’re viewed as a higher risk type of mortgage. This in turn leads to higher interest rates, which can make it easier to miss a payment or default because you can’t afford to pay your mortgage. You also usually have to pay what’s known as a mortgage indemnity premium.

Although there are lenders where you can still take out a 100% mortgage with a bad credit history, the more “traditional” banks and lenders will often prefer it if you have an excellent credit score. This is due to the perceived risk involved – the way mortgage companies look at it, if you have excellent credit you’re less likely to default on the mortgage payment.

One of the other biggest disadvantages of taking out a 100% mortgage is how it affects the equity in your home. Because you’re not paying a deposit, there isn’t any initial equity in your home. So if the market suddenly decreases in worth, and house prices fall, you won’t have the safety net of extra money in your home to fall back on. If you were then out in a position to sell your home, you could find that the 100% mortgage is higher than your property’s value, giving you negative equity and a large financial hole to fill.

If you decide that a 100% mortgage is for you, the good news is that you have a choice of mortgages to choose from, just as you would in a more conventional mortgage. You can pick from fixed rate, discounted rate, capped or variable. In fact, the only real difference is that you can’t take out a buy-to-let mortgage unless you put down a deposit.