It is something of a British tradition to buy a house as soon as possible? Owning your own home is more important to us than it is to our European neighbours. Even if we don’t “own” a single brick because we have borrowed 100% to buy the house... it is still “ours”.
But there is more to buying than just the pride of ownership, and the feeling of reaching a personal milestone. There are significant pressures on first time buyers simply because they don’t have a home of their own. For instance mortgage brokers meet many first time buyers who don’t necessarily want to buy a house yet, but feel that if they don’t do it now, they just wont be able to do it in the future because of increasing house prices. It’s understandably ironic that people feel forced to put more pressure on themselves financially as a matter of prudence.
In such circumstances, many first time buyers have no alternative but to borrow 100% of the house price because their savings will be used to cover other related costs such as legal fees, stamp duty, furnishings and so on. The 100% mortgage was developed to assist those with insufficient savings for a deposit, and those who haven’t the time to save for a deposit. But there are a few things to consider.
You will only qualify for a 100% mortgage if you have sufficient income and a good credit history. From the mortgage provider’s perspective, a 100% loan of house value represents a greater risk than a loan of 50%. If they have to repossess, it could be more difficult to get their money back on the 100% loan. For that reason, they will want to know that an applicant for this type of mortgage has kept to previously agreed credit commitments. What’s more, if you borrow 100%, you will repay at a higher interest rate. Again, from the lender’s perspective, you as a customer represent a greater risk, so there should be a greater reward for them.
The most serious consideration should be what might happen if your circumstances change. If you default on the mortgage and your home is repossessed, there is the possibility that your house will be sold for less than you owe on the mortgage. You will still owe this outstanding balance, and you will have lost your home too. To protect them, some lenders require you to pay a Higher Lending Charge. This goes towards an insurance policy that will pay the mortgage provider the difference between the forced house sale price and outstanding mortgage. However, the sting in the tail is that after the insurance company pay off the outstanding balance to the mortgage company, they then come after you for it! The insurance policy that you pay for is to protect the mortgage company, not you.
There are ways that you can reduce the risk of this ever happening to you, and it starts with getting serious about what you can afford, and assessing how secure your employment and finances are. A good mortgage adviser will discuss your budget, explain the risks and demonstrate that there are insurances that you can use to protect your finances. Most people never go through such a harrowing experience as having their home repossessed, but it does happen. Therefore the best advice is to be realistic about your budget and be open and honest with a mortgage adviser from the beginning.
