Many Australian's want to know: What's a 100% home loan?
What’s a 100% home loan?
August 31st, 2010
100% home loans finance the entire appraised value of the house and do not require a deposit from the buyer. Such mortgages are not always available due to fluctuations in financial markets, and when they are available they tend to have tighter credit requirements as well as being more expensive.
A deposit serves a number of functions for a home loan lender. Firstly it provides a cushion in case the loan goes wrong. If the loan is not repaid and the house is foreclosed, it may be resold for a lower value than its original purchase price – which can be quite likely if it is sold quickly. In such instances, the lender can still recover all or almost all of the loan amount through the deposit. With a 100% mortgage, however, the only guarantee the lender has is the borrower, similar to an unsecured loan.
A deposit also discourages the borrowers from defaulting, as they would lose a large percentage of their deposit. Lenders always prefer to lend if the borrower has a personal financial stake in the loan being repaid on time. 100% home loans do not have this financial stake from the lender.
Deposits also demonstrate a borrower’s financial discipline. It requires a certain length of time to save the deposit for a house, and it requires a certain level of financial sacrifice. The ability to save a deposit is a good indicator that the mortgage will be repaid.
With 100% home loans, the mortgage provider lends 100% of the house’s appraised value. The appraised value may be different from the purchase price and if the price is higher, the borrower will need to put up the difference between the two. Almost all lenders will insist on mortgage insurance, and possibly life insurance as well, so that under most circumstances, the lender will be repaid. The premiums are an extra cost borne by the home buyer.
These loans can be useful for first time buyers who have no capital. They don’t tend to be widely available, except when the housing market is buoyant. 100% mortgages are most commonly available through a mortgage broker.
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