Homeowners who bought their dwellings a year ago should be, on average, better off today compared to 12 months ago. However, buyers, particularly first-time buyers, who took out 100 per cent mortgages recently, have reason to be concerned according to Fool.co.uk.
This is especially worrying when considering that around one in 20 of today's first-time-buyers have taken out one of these mortgages - meaning a dip in price will see them floudering in the midst of negative equity.
Currently, 100 per cent mortgages still represent a relatively small part of the mortgage market, and are offered by just a handful of providers. Interest rates on these home loans, which are clustered around 6.5 per cent, compare unfavourably with other types of mortgages that are around 1 per cent lower. 100 per cent mortgages are more expensive because of the greater risk that lenders assume, and criteria are expected to tighten following the recent slowing of the housing market.
Without the benefit of rising house prices that increase the equity homeowners have in their houses, borrowers on 100 per cent mortgages will be severely disadvantaged. So, while many homeowners with substantial equity in their home can scour the market for best buys, borrowers on 100 per cent mortgages cannot.
In a stagnant housing market, first-time buyers on 100 per cent repayment mortgages may find that they only have around 3 per cent equity in their homes when their current 100 per cent deal ends.
It could take as long as 34 months to build 5 per cent equity in their homes, and considerably longer if house prices fall. What’s more, many first-time buyers take out 100 per cent mortgages on an interest only basis relying on increases in house prices.
The upshot is that first-time buyers may be prisoners in their own home until house prices rise again. Additionally, the scarcity of 100 per cent mortgage providers, and the tightening of criteria, means that borrowers will be restricted to a handful of providers when their current deal, which tends last around 24 months, ends.
David Kuo, head of personal finance at fool.co.uk, said: “Borrowers on 100 per cent mortgages can tip the scale in their favour by ensuring that they choose the repayment option rather than the cheaper interest-only one.
"They should also overpay their mortgage as often as they can afford. This will ensure that they are regularly chipping away at their debt. And with more equity in their homes, their choice of mortgage providers improves too.
“100% mortgages are supposed to provide first-time buyers with a helping hand onto the housing market. But in a market where house prices stagnate or fall, what providers give with one hand may be taken back with the other when the mortgage deal ends.”
