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100% Mortgage

What are they - How they work - Pros & Cons

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To put it simply 100% mortgages are dangerous. Buy a property for £100k and the bank lends £100k.

This means there is a massive risk of negative equity, ie if the property falls in value by 10% you'll owe £10k.

100% Mortgages - What are they - How they work
100% mortgages are more a feature of booming property markets and therefore as the market got hit in 2006-07 not many lenders are keep to grant them. Basically, if you don't have access to at least a 10% deposit expect to struggle when finding a lender to do business with you.
More risk = higher charges
100% mortgages are obviously far riskier for the lender than if it were to lend 70% of a property's value. Increased risk in banking always means higher costs to pay. For example -
  • Expect a higher interest rate, probably 1%+ on top of the current Best Buy deals
  • Expect to pay a Higher Lending Charge - More details on mortgage charges
  • Higher arrangement fees
  • And possibly tighter penalties if you want to remortgage etc
Negative equity problems and moving property

Negative equity is not just about losing money. It might also mean you're stuck with your property for many years and can't move out because you can't afford to pay the loss.

For example, if you bought a property for £100k using a 100% mortgage and it's now worth £85k, in order to move you've got to pay back £15k to your lender.

If this isn't possible then you are unable to move and are stuck in your present home. This might not pose a problem if you work nearby but if you have to move to a different part of the country it's not possible. If you were to rent however you remain flexible.

How interest is charged
Interest rates can come in many styles, for example -
  • Fixed for a certain period of time, say 1 - 5 years
  • Variable, usually the lender's SVR which is normally the most expensive rate they charge
  • Discounted - look for these deals where the lender will offer say a 1% discount for a 1-2 years etc
  • More on Mortgage interest rates
Hard to find any real positives towards 100% mortgages.

However, in a strongly rising property market they're popular with speculators and first time buyers. Speculators like them because they offer leverage, ie they don't have to put in any cash to buy property. And they suit first time buyers because they often don't have any money to pay for an initial deposit.

Buying tactics, tips and tricks
Want the right mortgage at the best price? Then start by downloading our free mortgage guide and follow the 4 easy steps.

As for tips on buying a 100% mortgage there aren't any as it's tough, if not impossible to get a 100% deal in the current climate. Plus, as I've remarked before they're extremely risky.

This is why if you cannot afford a 10% deposit (for most lenders this is the minimum) it's a far better proposition to rent until you've saved up or can get help from relatives.

LearnMoney.co.uk comment :
Buying a property is as much about security as anything else, a place to live, sleep and possibly raise a family. But when a 100% mortgage is used the property becomes a risky trade and for this reason 100% mortgages are suspect financial products.

Yes, it's tough for many people to find a 10% deposit (the minimum that most lenders will accept these days) but the advantages are numerous - less risk and cheaper mortgage payments (and setup fees) to name just two. So until people can find or save for a 10% deposit renting would seem like a far better option.

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