The pros and cons of a 100% LTV mortgage for first time buyers
Getting onto the housing ladder is harder than ever. With rents continuing to rise many people just don’t have enough income to be able to afford to save up for a deposit on a house. Therefore a 100% loan to value mortgage may seem like a great way to get onto the housing ladder if you can’t get together a 5% deposit for your first property.
The advantages of a 100% LTV mortgage
The most obvious advantage of a 100% loan to value mortgage is that you are able to access one in order to buy a property without needing to find the money for a deposit. If you are able to satisfy the criteria in order to apply for one then you could then go on to build up equity in your own property rather than paying someone else for the privilege of living in their property. Unfortunately this is pretty much the only advantage associated with 100% mortgages.
The disadvantages of a 100% LTV mortgage
The first problem you are going to face if you only have the option of using a 100% loan to value mortgage to buy your first property is that they are now extremely rare. This is because lenders see them as a risky loan type because you have not provided any deposit to start your equity off with. The reason this is seen as being so risky is because if there is a dip in the housing market and the value of your property decreases you could find yourself in negative equity right from the beginning. Negative equity is something that was a huge issue for people who held 100% LTV mortgages when the housing market crashed in 2007. They were banking on an increase in their property price in order to reduce the LTV ratio, but when the property prices dropped, they instead found themselves in negative equity and also with high repayments to make as they were on a higher interest rate than those with lower LTV ratios.
How do I get a 100% LTV mortgage?
There is currently only one way to get a 100% loan to value mortgage that requires a family member, or members, to act as a guarantor for part of your mortgage. This is the only way in which a lender will deem the risk to be lowered enough to then offer you 100% of the value of your property as a loan. See Guarantor mortgages for further information and advice.
What are the conditions of a 100% LTV mortgage?
The main condition is that you will need a family member who is willing and able to guarantee 25% of the value of the property that you wish to buy. What this means in real terms is that should you be unable to meet the mortgage payments and your home is repossessed and sold to recoup costs, you family members would then be liable for any shortfall. In the worst case, the value of your property could have fallen significantly and therefore your family member would have to find the money to make up the difference between the new property value and your mortgage loan value.
What sort of interest rates Will I Pay?
On a 100% LTV mortgage you can expect to pay a lot more than for an average fixed rate mortgage with a loan to value ratio of around 75%. If you take an average interest level for a two or three year fixed rate deal as being around 3%, you could generally expect to pay approximately double this for your loan. Therefore your repayments will be a lot higher than if you have managed to save up for a 5% deposit, for which there are a number of schemes to help out first time buyers where the government will either provide your guarantee, or the will provide you with an equity loan in order to give you a 25% deposit to give you access to all of the standard mortgage products.
Talk to an expert
Taking on a 100% LTV mortgage is not something to try and do quickly, so speak to a specialist mortgage broker in order to make sure you have all of the facts before you make your decision and application.
Related mortgage articles