Julia Harris mortgage analyst at moneyfacts.co.uk comments:
"Today many first time buyers simply cannot afford to save large deposits for their first property, in fact many need to borrow the value of the property in full through a 100% mortgage. In a buoyant and rising property market, it is not surprising that over 200 mortgage products provide 100% mortgages to cover the total property price. But is allowing borrowing of 100% plus a step too far?
"In total 5 lenders offer 25 products with LTVs in excess of 100%, ranging from 102% to 125%. Scottish Widows being the only one of these lenders to restrict its product to professional workers, those that would have a valid reason for not having any savings and have the income growth to potentially make overpayments in the future.
"If you were unable to accumulate any savings before stepping on the property ladder, then committing to this long term, high monthly repayment may be one expense too far.
"One reasons for borrowing extra may be for home improvements; it may be argued that this could raise the value of the property, but using these funds for a holiday for example as quoted on the Northern Rock website, is not really what mortgages were designed for. Would you really want to be paying for this year's holiday for the next 25 years?
"While these mortgage deals may help you take your first step on to the property ladder, just how long will it take for property prices to rise to a level which matches your mortgage? House prices have risen continually over the last 11 years but this does not been the future will hold the same fortune. So you could be trapped in a 'negative equity' situation for many years to come, preventing you from making the most of the more competitive mortgage deals or from moving up the property ladder.
"With only a handful of lenders in this niche market, and the risks being much higher, the interest rates available are far from competitive. On average you could expect to pay around 6%, a 1.25% premium over bank base rate. Which works out as an additional £132.70* per month to an average mortgage repayment.
"These offers are only made possible by the continued growth in property prices, but how long will it be before the housing market runs out of steam? And in this situation, where 'negative equity' is agreed from on outset, a slip in housing prices could soon place people in a very difficult situation. For any one opting for one of these deals, they should think very carefully about the contract they are committing to. These deals are often complex with high rates and sometimes high fees"
* Based on a £150K repayment mortgage over 25 years – comparison based on an interest rate of 4.5% and 6%** 105% available for STB and remortgages
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