A borrower who is taking out a mortgage usually must pay some money out-of-pocket toward the home’s purchase price. This money is known as a downpayment and is a common mortgage lender requirement for loan approval. Downpayment amounts vary by loan type, the home’s value and the lender’s criteria, but may be as high as 25 percent of the purchase price. However, some lenders offer 100 mortgages, also known as 100% mortgages.
100 mortgages cover the home’s full purchase price; the borrower doesn’t have to come up with money to get the loan. For example, if a home is £60,000 and the borrower has a traditional mortgage with a downpayment requirement of 20 percent, he must have a downpayment of £12,000 to buy the home. If he has a 100% mortgage, the lender will allow him to borrow the full £60,000 he needs.
A mortgage that covers the full value of a property allows a borrower who doesn’t have cash on-hand to buy the home. However, 100% percent mortgages often have higher interest rates because of the increase in perceived risk; the borrower doesn’t have any of his own money tied up into the home, and this makes him a higher default risk. Addi tonally, if the housing prices in the area fall, the borrower may end up with a loan that has a higher balance than the home is worth. This condition is called negative equity; even though the borrower is paying on the loan, he’s not building any value. Some lenders “tie-in” borrowers who have 100% loans. The loan includes a clause discourages the borrower from paying off the loan early or refinancing with another lender. If the borrower violates the tie-in terms on the mortgage, he usually has to pay a penalty to the lender, as set out in the mortgage paperwork.