You may have heard a lot in the press about 100% mortgages with some articles criticising such products and others applauding their return. But what exactly is a 100% mortgage and why are they causing so much fuss?
100% mortgages are simply mortgages which cover the whole of the purchase price of a property. Normally when buying a house a buyer will pay a portion of the property price direct to the owner as a deposit and get the remainder through a mortgage from a lender. The amount of deposit you put down determines the ‘loan to value’ ratio or LTV of the mortgage. So, for example, if you are buying a property for £100,000 and you pay £10,000 as a deposit (which is 10% of the price) you will need to borrow the other 90% from a mortgage lender. Your mortgage will therefore be 90% LTV.
With 100% LTV mortgages the borrower does not pay any deposit. Instead, in the scenario above, he would borrow the full £100,000 from a lender.
So what’s the problem? Well, such mortgages are considered risky because (with interest considered) as soon as you take the mortgage out you’ll find yourself in negative equity. In other words, you’ll owe your mortgage lender more than your property is worth.
Such mortgages all but disappeared following the credit crunch but over the last couple of years they’ve started to re-emerge. There are now a handful of lenders in the market offering 100% deals.
The difference with the 100% mortgages of the post credit crunch world however is that they often require a guarantor – normally a parent – to essentially promise to be responsible for your debt if you fall into difficulty.
If you’d like to know more about high LTV mortgages or alternative options for buyers with small deposits come visit us at We Know Mortgages Ltd. We’ll be happy to help.