First time buyers are borrowing larger and larger amounts to get on the property ladder, according to the Mortgage Advice Bureau (MAB).
Full year figures from the independent brokers revealed a 50% increase in the number of buyers taking out mortgages in excess of 100% Loan to Value (LTV) in 2006 compared to 2005.
The MAB says the findings highlight the range of measures available to first time buyers to secure their first home.
They also said they highlight the growing popularity of these products for first time buyers in a time of increasing house price inflation and interest rate rises.
The company said that buyers often choose to take 100% LTV as a means to preserve capital, rather than use it as a deposit.
These buyers opt for this so that they can use saved capital to fund additional costs at the outset, for example, decorating or furnishing their new property.
However, the MAB urges borrowers considering this option to ensure they are aware of the possible repercussions before they go ahead.
Firstly, the products often carry a higher interest rate of at least 1% more than other mortgages and higher lending charges often apply, adding another £2-3,000, which will increase the interest paid on the loan.
Also, with a 100% LTV mortgage, the buyer has no equity to fall back on should the price of the property, achieved in a forced sale scenario, fall below the price paid for it originally.
In this scenario, the buyer will remain responsible for paying the lender any shortfall.
Brian Murphy, MAB’s lending manager, said: “In attempts to make the transition on to the property ladder as easy as possible for these buyers the option to borrow more than the value of their home is proving very popular.
“Many in the market still view these products as the final resort for mortgage borrowing. However, as seen through the increasing numbers of buyers opting for these products in 2006, these mortgages are now a very real solution for first time buyers who stand little hope of entering the housing market without them.
“They offer an opportunity to move away from increasing monthly rental payments and offer some buyers an alternative arrangement to preserve capital without using it as a deposit.”
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