There aren't many of us who like the thought of being imprisoned for 3 years...
However, according to the impartial money folk over at Fool, 1 in 20 first-time buyers may be imprisoned in their homes for that long if house prices stagnate!
According to the Halifax, house prices fell in September for the first time in 9 months and homeowners who bought their dwellings a year ago should be, on average, better off today compared to a year ago.
However, if you are a homebuyer, particularly a first-time buyer who took out a 100% mortgage recently, then you have reason to be concerned.
It is estimated that around 1 in 20 first-time-buyers take out these mortgages to cover the full value of their home. A dip in house price, albeit a small one, could push those of you on 100% mortgages into "negative equity" and that isn't such a good thing!
Negative equity means that you cannot sell, as the amount you owe on your mortgage is greater than the value of your home. It also means that you could be stuck on 100% mortgages for some time!
Currently, 100% mortgages still represent a relatively small part of the mortgage market, and are offered by just a handful of providers. Interest rates on these mortgages, which are clustered around 6.5%, compare unfavourably with other types of mortgages that are around 1% lower.
100% mortgages are more expensive because of the greater risk that lenders assume, and criteria are expected to get tighter following the recent slowing in the housing market.
Without the benefit of rising house prices that increase the equity you have in your home, if you are a borrower on a 100% mortgage, you will be severely disadvantaged. So, while many homeowners with substantial equity in their home can search the market for the best buys, borrowers on 100% mortgages, cannot.
In a stagnant housing market, first-time buyers on 100% repayment mortgages may find that they only have around 3% equity in their homes when their current 100% deal ends.
It could take nearly 3 years to build 5% equity in their homes, and much longer if house prices fall. What's more, many first-time buyers take out 100% mortgages on an interest only basis relying on increases in house prices.
What it means is that many of you who are first-time buyers may be prisoners in your own home until house prices rise again!
Additionally, the scarcity of 100% mortgage providers, and the tightening of criteria, means that borrowers will be restricted to a handful of providers when their current deal, which tends to last around 2 years, ends.
David Kuo, Head of Personal Finance, at Fool.co.uk says:
"Borrowers on 100% mortgages need to be aware that stagnant house prices may keep them shackled to their uncompetitive lender and prisoners in their own home until house prices rise again.
"However, they can tip the scale in their favour by ensuring that they choose repayment mortgages rather than the cheaper interest-only options. 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."
© www.fool.co.uk 2007
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