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 Rise Of The 100% Mortgage Product 
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Post Rise Of The 100% Mortgage Product
by: Michael Sterios

The latest trend in the mortgage market has been an increase in the number of borrowers taking out a 100% loan-to-value mortgage. This means that the loan-to-value ratio of the mortgage is 100% rather than the 85% or less normally attached to more traditional mortgage products.

A 100% mortgage can be used to fund the entire cost of purchasing a property, eliminating the need for a deposit. The only costs that are not covered are one-off expenses such as stamp duty, legal fees, and mortgage application and brokerage fees.

Some cash poor borrowers are even opting for mortgages with an even high loan-to-value ratio, such as 125% mortgages, in order to pay for all of the expenses incurred upon purchasing a property in addition to the cost of the property itself. This is beneficial to property buyers who do not have the funds required to pay for these expenses themselves.

While there are obvious benefits to a 100% mortgage, there are also disadvantages.

The biggest disadvantage is that any fall in the value of the property purchased will result in instant negative equity. This can cause problems if the borrower wishes to sell their property because they may not recoup enough money from the sale to pay back the entire loan balance. If this occurs the borrower may be left with no property and a small mortgage balance to finish paying off.

Negative equity can also make it virtually impossible to remortgage. Lenders will be reluctant to finance a property which has a mortgage balance higher than the open market value of the property. Borrowers should therefore attempt to pay off some of the balance of their home loan if they apply for a 100% mortgage.

In addition to negative equity, 100% mortgages have other disadvantages such as hefty fees and high interest rates. These extra costs provide a hedge against the extra risks faced by the lenders if the borrowers cannot keep up with their monthly mortgage payments.

Despite the disadvantages, lenders previously appeared to be keen to offer a variety of products, such as the 100% mortgage, that are aimed at helping people who have little or no savings take a first step onto the property ladder. In fact there were more than one hundred and fifty 100% mortgage products on offer from various UK lenders, and the number of applicants had doubled in recent times.

This was good news for borrowers as the high volume of lenders to choose from made the market more competitive. However because of the recent credit crunch in the USA the number of high loan-to-value products available on the UK market has begun to decline. Lenders are tightening their belts now that property prices have stabilised and 100% mortgage products are no longer a widely available as they were several years ago.

They have no disappeared from the market completely, however, meaning that there are some products still available to borrowers that lenders perceive as being low risk. Once the effects of the credit crunch soften the market for 100% loan-to-value mortgages should bounce back.

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Sun Dec 14, 2008 11:09 am
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