100 MORTGAGE: WHAT IT WILL COST YOU?

2007-03-08 10:33:40

( Financial )



100 mortgage is a mortgage where lender lends you the full amount of the property that you want to buy. The 100 in the term actually mean 100 percent. It means that you will not be making a cash outlay as an initial equity to the property you mortgage.

Newly married young couples who are first time buyers of homes usually prefer 100 mortgage. It eases cash flow problems required when applying for a regular mortgage particularly when they are still paying for their college education loans. Many young professionals defer owning a house due to the needed cash outlay in applying for equity mortgage.

The COST OF 100 MORTGAGE

Higher Interest Rate

Young couples must be prepared for the consequences of applying for 100 mortgage. It charges higher interest rate due to the higher amount of risk faced by financial institutions in lending the full amount of the purchase cost of the property. The lender assumes all the risk in 100 mortgage transactions. They usually lend bases on a loan to value mortgage where the amount of mortgage approved is only a percentage of the total cost of the property. Borrowers share in the risk by putting up the cash balance needed to buy the property.

Mortgage Indemnity Payment Passed on to Borrowers

Lenders might require you to agree to a mortgage indemnity guarantee policy. It is an insurance policy to indemnify the lender against lost of their money when borrowers default on their loan repayments. The borrower shoulders the payment of the insurance premium, which usually average six percent of the total loan amount of loan approved. It is usually charged to borrowers as a lump sum and included in mortgage repayments. Amount of monthly repayments will be higher when mortgage indemnity payments are added.

Higher Risk of Negative Equity

Borrowers have higher risk of going into negative equity when house prices go down in the market. Thus, lenders protect themselves by charging higher interest rate. Lenders will sell the property if borrowers cannot keep up with repayments. The property will be sold at a lower price in case of negative equity.


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