The boss of a mortgage brokerage is advising would-be home buyers that the tempting new 100% mortgages carry substantial risks.
Joseph Lane, director of Mortgage Lane, accepts that the products launched this week by April Mortgages and Gable Mortgages are attractive, especially to those so far unable to save for a deposit.
But he cautions: “These kinds of products do accompany substantial financial and behavioural risks.
“First of all, there is the risk that those opting for a 100% mortgage – particularly those who’ve not needed to make lifestyle changes or sacrifices in order to save for a deposit – may lack the financial discipline needed that comes with homeownership.
“Saving up for a 5% – 10% deposit on a home ensures that buyers have a real stake in their purchase, and could possibly treat these newly released products as easy access to wealth or as a mere alternative to renting.
“Secondly, with 100% mortgages, buyers are starting with 0% equity in the property they are purchasing. If there is any kind of dip in the housing market and the home loses value, they may find themselves in negative equity, potentially trapping the homeowner and meaning they could take a financial loss should they need to move or relocate for any personal reasons, such as job relocation, health or family changes.”
And Lane then warns that those in negative equity may also find it much more difficult to remortgage or switch to a better rate or deal, as lenders will typically require a certain loan-to-value (LTV) ratio in order to refinance.
Additionally he urges those considering applying to have a reality check – to offset the heightened risk, lenders of 100% mortgages may charge higher interest rates, which could make monthly payments more expensive over the life of the loan.
He concludes: “It’s also common for lenders to set higher arrangement fees, early repayment charges, or impose stricter credit assessments on those looking to take advantage of the products.”
This article is taken from Landlord Today