Mortgage: Deposit vs. no deposit

By: James Miller

You’ve found the house you want and you have worked out that you can realistically afford to meet the monthly repayments. But there is one problem - you don’t have a deposit.

Finding a deposit for a house can be a real problem. While you save like crazy, house costs are rising all the time, meaning that you need to save more and more money for a deposit… and so it goes on.

This is a problem particularly for first time buyers who are finding hard to get their first foot on the property ladder.

However, there are 100% mortgages available, where you don’t need to pay a deposit at all.

As with all good things, there can be downsides. If you are considering a 100% mortgage because you are struggling to raise a deposit, you need to fully understand any pitfalls associated with it.

Firstly, 100% mortgages cost more. This is because the mortgage lender is stumping up all the money needed to buy your house, rather than spreading the risk, with you paying 5 or 10% of the cost.

So, you’ll be paying an increased APR.

Secondly, should house prices fall (and it can happen - the last property slump was in the late 1980’s), you will find yourself in a negative equity situation. This means that if it happens again and, for example, you sold your house tomorrow, you wouldn’t get the mortgage amount back on it. This would mean that you would still have an outstanding mortgage balance – and no property!

100% mortgages can be the solution where you don’t have a deposit, but do go in with your eyes wide open.

About 100% Mortgages

Although mortgage repayments are within the means of many would-be buyers, finding the cash for the deposit might seem, if not impossible, at least very difficult. This is where the 100% mortgage can be invaluable, with the deposit, plus perhaps other fees such as stamp duty, moving fees, etc., covered by the loan repayments.

With a 100% mortgage, the lender is obviously running a higher risk, therefore borrowers could find the repayment rates higher – you could expect an increase of around 0.5% or 1% more than would be the case if you had the money for a deposit. This rate could be either variable or fixed although discount rates could help to bring down the initial costs.

A majority of lenders would also require a Mortgage Indemnity Guarantee (MIG) to protect themselves on issuing loans over 90%. This protects the lender should the borrower default on their repayments. An Indemnity Guarantee is a percentage of the loan and is something which the borrower simply has to pay and with it running the life of the mortgage, the interest over the term of the loan could add up to thousands of pounds. Early redemption on a 100% mortgage would not necessarily be higher than that of a standard mortgage, but with a higher loan, would cost you more if you try to remortgage before the tie-in period is up.

The housing market as both buyers and sellers well know, is liable to fluctuation and if you decide to sell at a time of a sudden drop in the market, you may not generate enough funds to repay your mortgage and find yourself in the unenviable position of negative equity. This is only a situation you need worry about if, for whatever reason, you decide to sell. Being able to cope with a rise in interest rates is much more important. Just remember that if you only want to keep the property for a short time, then a 100% mortgage should be avoided.

To sum up, there are certain distinct advantages in applying for a 100% mortgage but only do so after weighing up the pros and cons. A 100% mortgage can get you started on the property ladder without a deposit and so keep your savings for other necessary expenditures, such as furniture, legal fees, etc., etc. Also with house prices on the increase, you could switch to a better rate and be better off financially.

Niche Article Directory: http://www.thatsmyniche.com

More information : www.mortgage-on.co.uk mortgage-remortgage.blogspot.com/ www.mortgage-where-to-go.co.uk James Miller is a freelance writer specialised in consumer credit, covering topics such as how to deal with bad credit, mortgages and insurance. He aims to help people navigate the financial industry.

Please Rate this Article

5 out of 54 out of 53 out of 52 out of 51 out of 5 

Not yet Rated