The latest trend in the mortgage market has been an increase in the number of borrowers taking out a 100% mortgage. This means that the loan-to-value ratio of the mortgage is 100% rather than the 85% or less normally attached to more traditional mortgage products.
A 100% mortgage can be used to fund the entire cost of purchasing a property, eliminating the need for a deposit. The only costs that are not covered are one-off expenses such as stamp duty, legal fees, and mortgage application and brokerage fees.
Some cash poor borrowers are even opting for mortgages with an even high loan-to-value ratio, such as 125% mortgages, in order to pay for all of the expenses incurred upon purchasing a property in addition to the cost of the property itself.
While there are obvious benefits to a 100% mortgage, there are also disadvantages.
The biggest disadvantage is that any fall in the value of the property purchased will result in instant negative equity. This can cause problems if the borrower wishes to sell their property because they may not recoup enough money from the sale to pay back the entire loan balance.
If this occurs the borrower may be left with no property and a small mortgage balance to finish paying off.
In addition to negative equity, 100% mortgages have other disadvantages such as hefty fees and high interest rates. These extra costs provide a hedge against the extra risks faced by the lenders if the borrowers cannot keep up with their monthly mortgage payments.
Despite the disadvantages, lenders appear to be keen to offer a variety of products, such as the 100% mortgage, that are aimed at helping people who have little or no savings take a first step onto the property ladder.
In fact there are now more than one hundred and fifty 100% mortgage products on offer from various UK lenders, and the number of applicants has doubled in recent times.
This is good news for borrowers as the more lenders there are to choose from, the more competitive the market becomes, which should lead to a decline in the excessive fees and high interest rates that are currently charged on 100% mortgage products.
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