100 Percent Mortgages

Buying a home is a dream for many people, but many would-be homebuyers are often put off by the large down payment required by most lenders. Typically, lenders ask for ten percent of the selling price up front, and many people cannot raise this kind of money. Therefore, instead of being able to buy their own home, these potential buyers remain locked in the cycle of having to pay rent each month. However, many lenders are offering a mortgage that covers 100 percent of the purchase price, with no down payment required. These 100 percent mortgages are now allowing many people to make the transition to owning their own home.

It may seem logical for lenders to want to offer as much money as possible. Why would lenders demand down payments you might ask, when they could charge interest on that additional 10 percent? The reasons for these down payments are twofold:

1 They want a good faith gesture on your part, to show that you are not taking your debt lightly. If you have invested several hundred or thousand pounds of your own money, it is more likely that you will continue to make payments on your mortgage.

2 They do not want to lend the entire value of the home purchased because they then become vulnerable to negative equity. Negative equity occurs when the value of a home drops below the price paid for that home. Negative equity is not a problem if you are living in your home, but if you default on your mortgage, the bank may be forced to sell the home at a substantial loss. Banks love to lend money, but they hate losing money!

Because of these impediments, 100 percent mortgages were rarely seen before the 1990s but as competition for customers became fiercer, lenders began to look to new avenues to build their customer bases. Many lenders now offer 100 percent mortgages, and some will even offer extra money to help you furnish or renovate your new home. This could mean that you have a mortgage of up to 125 percent of the value of your home!

With all of these added features and the added risk for lenders, 100 percent mortgages do not come cheap. The interest rates for these mortgages are typically much higher than for other mortgage products – in part because of the risk involved, and because there are fewer lenders that offer 100 percent mortgages. Most borrowers will also have to pay a mortgage indemnity guarantee (MIG) of several thousand pounds, which is added to your mortgage.

If you have the money, it is a good idea to place a down payment when you are buying a home. However, if you are short of money and want to escape the “rent cycle,” a 100 percent mortgage can help you get into the housing market right away.