By: Tim Bennett
29.11.2018
Is the 100% mortgage about to make a comeback? Tim Bennett explains why he hopes not, in his latest video.
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Why 100% mortgages are a bad idea
Rumours abound that a type of mortgage that was last put to rest in the wake of the financial crisis, may be about to make a comeback. Here is why I am still no fan of the 100% loan.
Background
With the property market in a number of parts of the market stagnant and first tine buyers struggling to get onto the ladder, the Building Societies Association recently mooted the idea that the 100% mortgage should be relaunched. However, there are several causes for concern around this as a solution to flagging property demand.
Mortgages – a recap
The term mortgage is just short-hand for a loan secured on a property. A lender forwards a buyer the funds they need, knowing that should that buyer fail to meet interest payments or not repay the outstanding capital, they can seize the underlying home and sell it.
On the plus side for the borrower, the interest rate on mortgages is below that for personal loans and overdrafts, both of which are usually unsecured.
Key risks
Anyone climbing onto the property ladder does so in the face of some pretty stiff challenges.
The danger is that if someone takes out a loan for the full value of a property, they could be thrown straight into negative equity should prices fall.
The negative equity trap
This is illustrated below. If you buy a house for £500,000 with a 100% loan and the property subsequently loses £100,000 of its value (or 20%), your negative equity is £100,000.
Why this matters
Negative equity is not just a numeric inconvenience – it may stop you selling a property or remortgaging at a competitive rate, if at all.
The way forward
This is why I am no fan of very high “loan to value” mortgages, of which this is an extreme case. The solution to property unaffordability does lie with measures designed to stimulate demand – more needs to be done on the supply side. And even if a buyer is in a secure job or is expecting an inheritance (two examples put forward by the BSA), that does not justify piling into property with no equity. Better to wait and save.
Please contact your Investment Manager to discuss any of the points raised here or to find out more about ways to build a property deposit.
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