With the new buoyancy of the property market, a raft of providers have entered the 100 per cent-plus mortgage market in the past two years. There are now more than a dozen to choose from. The underlying lending rationale is that in a rising housing market, mortgage providers risk less and have more to gain if a customer should default and they are forced to repossess a property.
Companies had all but withdrawn this product in the dog days of the early 1990s, when a combination of widespread repossessions, negative equity (property value less than the amount of the loan) and a stagnant housing market gave lenders cold feet.
These 100 per cent loans are aimed largely at first-time buyers who cannot raise the usual 5 per cent minimum deposit on their first homes. Lenders include Abbey National, Bank of Ireland Mortgages, Bank of Scotland, Yorkshire building society and telephone-based sellers such as The Mortgage Business and Mortgage Express.
There are also loans specially designed for those in negative or zero equity, from lenders such as Bank of Scotland and Cheltenham & Gloucester. Zero equity is where a property's value has risen back to the original purchase price, but individuals hold no actual equity in the property, and so may find it difficult to finance a move. Mortgage Express, for example, lends up to 130 per cent of the value of the current property under its negative equity scheme.
Ian Darby, marketing director of mortgage brokers John Charcol, says many 95 per cent borrowers fund the 5 per cent deposit from a bank loan or from parents, and do not actually have the money. In this circumstance borrowers might find it easier and cheaper to arrange a reasonably-priced 100 per cent loan rather than slip into secondary debt. Charcol's own 100 per cent loan consists of borrowing 75 per cent from Halifax at 6.23 per cent fixed over two years, with the other 25 per cent as a "second charge" loan at 9.85 per cent from Norwich Union. An attraction of this dual structure is that the borrower does not need to take out a mortgage indemnity guarantee (effectively negative equity insurance).
Some people also take out 100 per cent mortgages to work on and increase the value of the property. But Patrick Bunton, manager at London & Country mortgages, warns that individuals should check beforehand whether the sum they put in will be fully reflected in the increased value of the home.
Mr Bunton is deeply suspicious of 100 per cent mortgages, and believes individuals should only take them as a last resort - if, say, you are starting a family, and can no longer fit in your old one-bed flat. Such loans in the late 1980s overextended some borrowers, leading to mass repossessions of homes and huge debts.
Mr Bunton says that to justify this type of loan, borrowers must stay in the property for about five years to give it time to appreciate, thereby earning the owner some equity.
Robert Clifford, managing director of Nottingham-based mortgage broker MPI, also has reservations about 100 per cent loans. Although interest rates are better than in the 1980s boom, rates still tend to be about 1 per cent above standard variable rates rates. And most charge extortionate levels of Mortgage Interest Guarantee insurance (MIG). On a pounds 50,000 loan, a 100 per cent borrower might have to a pay a MIG of pounds 1,500. For a 95 per cent loan it would be just pounds 700. The MIG is a non-refundable, one- off premium which insures the lender, not the borrower, against negative equity. If the lender repossesses and sells your home, the MIG covers any losses it suffers.
One alternative to 100 per cent mortgages is 95 per cent loans that carry a 5 per cent cashback, from the likes of Abbey National and Bank of Ireland Mortgages. The cashback can be used to repay any borrowed deposit, while the MIG bill is slashed by more than a half.
q Readers can get a free copy of the 'Independent on Sunday's 27-page 'Guide to Mortgages', sponsored by Barclays Mortgages, by telephoning 0800 585691 or by returning the coupon below.
Dido Sandler works for 'Financial Adviser', a specialist publication.Reuse content