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The full Monty
Nia Williams looks at the pros and cons of borrowing the full value
of your new home
How
many of you are watching house prices rise and wishing you had enough
money to put down a deposit on your ideal home before it becomes
too expensive? How many of you are prevented from buying or moving
by all the initial costs incurred, such as the arrangement fees
and legal costs?
If this sounds like you then one solution could be a 100 per cent
mortgage. This cuts down your initial outlay substantially because
there’s no deposit to pay. Instead, you borrow the whole value
of your new home.
And of course the 100 per cent loan has its attractions. First or
second-time buyers can have other major costs to contend with, such
as buying furniture, getting married, or the imminent birth of their
first-born. It is easy to see why they may be unable to spare the
cash for a deposit – usually a minimum of 5 per cent of the
price or value of the property.
But those of you who are considering taking out a 100 per cent loan
should think before you leap. You must weigh up the pros and cons
and look into all the costs and other disadvantages involved before
making your decision.
One disadvantage is that 100 per cent loans are fairly thin on the
ground in comparison with the other deals around. Most len-ders
would obviously prefer borrowers to demonstrate some com-mitment
to the mortgage by paying a deposit, usually at least 5 per cent
of the purchase price. In some cases, 100 per cent mortgages are
charged at a higher rate of interest than mortgages where a deposit
has been paid, and special offers, such as discounted and fixed
rates of interest, are rarely as generous.
That’s not to mention the added monthly cost of taking out
a larger loan. Take out a 95 per cent repayment loan on a £60,000
property and, at a rate of 7 per cent, you are looking at monthly
payments of around £383.19. Borrow the whole £60,000
and, at the same rate, monthly payments rise to £404.40. That’s
£21 more per month, which doesn’t sound much but it
adds up to £254 more a year, or around £6,000 more over
a 25-year term. Plus you pay more interest.
Another mark against 100 per cent loans is the mortgage indemnity
guarantee fee, or MIG. The MIG protects the mortgage lender against
the increased risk involved in advancing larger-percentage loans,
and whilst it had disappeared as lenders tried to compete for business,
it has made a comeback. Many lenders allow the MIG premium to be
added to the loan, but you will then have to pay interest on it.
If you understand your 100 per cent mortgage then it could be good
for you. But if you can scrape together even just a 5 per cent deposit
you will have a much greater number of lenders, rates, cashbacks
and other special offers to choose from.
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