Buying, selling and letting - November, 2002

As house price have gone skyward, deposits have followed suit – and many are not able to put down the sort of start-up money it takes these days. That’s why no-deposit deals are so attractive to first-time buyers. Christina Jordan of Your Mortgage looks at the 100 per cent mortgage

Buying a home is a pricey business – it always has been – but in the last few years property prices have shot up and moved beyond the reach of many people. Traditionally, those who wanted to own their own home would save up an ample deposit and take out a mortgage. But what are you supposed to do when even a 10 per cent deposit on an average property is over £12,000?

Unless you're very wealthy or you suddenly come into money, you're going to be a long time saving that sort of sum. And to make the problem worse, house prices are currently rising at such a pace that by the time you've saved a deposit it may no longer represent 10 per cent of the property value.

In the face of this difficulty, and with increasing pressure to get that all-important first foothold on the housing ladder, significant numbers of borrowers are turning to 100 per cent mortgages to buy their first home.

Total repay

A 100 per cent mortgage means exactly that – you borrow the entire cost of the property and put no deposit down at all. This is helpful to those borrowers who want to buy immediately – and lenders that offer 100 per cent mortgages argue they enable borrowers to buy while house prices are still within their reach.

David Connolly, product development manager at Mortgage Express, claims there is an affordability gap between the amount customers can borrow responsibly (based on 3.25 times average income) and average property prices. And he believes that in the next few years this gap will widen even more as house prices increase at a faster pace than salaries.

On this basis it could make sense to get a 100 per cent mortgage now while you can still afford a property. But whilst they may sound like the ideal solution when owning a home looks increasingly difficult, 100 per cent mortgages are not necessarily 100 per cent consumer-friendly.

Buyer beware

Quite simply, you are never going to get the lowest rate on the market with a 100 per cent mortgage. In exchange for lending you the whole value of the property the lender will charge you a higher rate of interest. And this will, of course, bump up your monthly repayments.

In general, the bigger the deposit you put down the better the deals you will be able to get. And apart from not getting the cheapest rates, if you borrow 100 per cent you will have nowhere near the same amount of choice.

From well over 1,000 mortgages currently on the market, there are fewer than 30 available to those with no deposit. And of these there are very few fixed rate deals or flexible mortgages.

Sting in the tail

But even if you do get a reasonable rate there could be another sting in the tail – the MIG charge. The MIG – mortgage indemnity guarantee – is an insurance premium that protects the lender should you default on your payments. You have to foot the bill if you are borrowing a high proportion of the property's value and it can cost around £3,000 on a £100,000 property. If you can save a 10 per cent or 20 per cent deposit you can avoid paying a MIG (depending on your lender).

If you need to get on to the housing ladder immediately, then a 100 per cent mortgage could be worth considering. But go into it with your eyes open. You may be paying over the odds in return for your mortgage and there could be other costs involved. If you're happy with that and you aren't under any illusions that property prices will only ever move upwards, you could find that helping hand on to the property ladder. But if you want the biggest choice of the most competitive deals, get saving for that deposit now.