If you don’t have enough cash available to make the necessary 5-20% down payment on a house, you may require a 100% mortgage. A 100% mortgage basically covers the entire cost of the house purchase, without the need for a cash down payment.
Although a 100% mortgage may sound good, the number of lenders willing to lend 100% of the purchase price of the home is limited. For the lenders who are willing to provide a 100% mortgage, the interest rates will be higher than for a regular mortgage with a down payment, basically to make up for the increased risk the lenders are taking on.
Also, many lenders will charge a larger mortgage indemnity guarantee (MIG) premium for 100% mortgages. However, most lenders will allow you to add the MIG to your total mortgage cost.
100% mortgages may be the only choice first time home buyers have, especially if they have limited spare cash to use as a down payment. Perhaps you are buying a home that requires quite a bit of renovation and the cash you have saved will be going towards those costs.
However, if you have to borrow the maximum amount, i.e. the total selling price of the home, then you should be looking at fixed or capped interest rate mortgages as part of your 100% mortgage, as these provide protection against rising interest rates and thus shield you from increasing your monthly payments should interest rates rise. However, the down side is, if interest rates decline, you will not benefit from a reduction of your mortgage payments.
The advantages of deciding to go for a 100% mortgage are that you are able to buy the home of your dreams without having the necessary cash deposit or tying up cash you may need for other purposes. The disadvantage is that you cannot be choosy about your lender and you may be paying rates that are higher than the going market rates for mortgages with down payments.