100% 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.