What You Need To Know About 100% vs 95% Mortgages.
Updated: Jan 22, 2020
For many starting out on the property ladder, the idea of being accepted for a 100% mortgage is probably quite alluring, especially if you haven’t saved up enough of a deposit yet.
However, the question a lot of people have been asking is: “is this the best route to go down?” If you have questioned it, you’re not alone. Let’s have a look at the pros and cons, of both mortgage options.
Pros and Cons of 100% Mortgage
Having a 100% mortgage means that as a buyer, you provide 0% deposit against the bank loan (mortgage you are receiving to purchase a property). At first glance, this appears to be a fantastic opportunity, especially for first time buyers. However you do need to consider the risk associated with this approach.
0% deposit against your loan or mortgage
Cutting out the years of savings, so you can buy your home quicker
Family members, or whoever you’ve put up for collateral become secured leverage if payments fall through
If the value of the property decreases, you will immediately end up in negative equity as you have no buffer
If you’re in negative equity, it’s harder to re-mortgage or move
Higher interest rates on a 100% mortgage
Pros and Cons of 95% Mortgage
Having a 95% mortgage means you saved up a 5% deposit, which is common for first time buyers. For example, if you were buying a property worth £250K, you’d put down a 5% deposit of £12.5K. You’d then be borrowing £237.5K.
You can buy your home using a reasonably low deposit
You start with more equity within your home, which may lead to higher returns once sold
You are borrowing less from the lender
You’re not using friends or family for collateral
Lenders are more likely to accept because you have provided a deposit
You have to wait to buy until you’ve saved the deposit amount
Your interest rates could be still high
Although you have a buffer, you could still go into negative equity if the value drops
Moving forward with either mortgage option will always depend on your personal circumstance and being clear on your property strategy. For example, individuals that can afford the 5% deposit and know they are likely to move home in the future, should aim for a 95% mortgage. Assuming the property value increases over time, when it comes to selling your home you ‘should’ leave with a profit on top of the 5% you already own.
Whereas, if you are in a rush to get onto the property ladder with little money to spare, applying for a 100% mortgage might be the way to go. Ideally, you will need to have friends or family that are financially stable in order to offer their own assets up as collateral.
Ultimately, property buyers should have in mind their long-term goals when thinking about applying for a mortgage. Thinking about things like whether the property is your ‘forever home’, or if it’s simply a steppingstone on the path to your bigger goal would be a good place to start. Either way, investment in property always presents its risk, so you need to make sure you’ve come to a well informed conclusion before you apply for that mortgage.
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