According to Fool.co.uk, many first-time buyers could end up imprisoned in their homes if house prices languish.
Although many homeowners who bought a property 12 months ago should now be better off, buyers – first-time buyers more often than not – who recently took out 100 per cent mortgages could now be at a loss, according to the online financial company.
Head of personal finance at Fool.co.uk, David Kuo, said: “Borrowers on 100 per cent 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.”
Around five per cent of first-time buyers take out 100 per cent mortgages in order to help them onto the property ladder. However, even a slight decline in property prices could take these homeowners into negative equity. This leaves them with no option but to keep hold of their homes as the value of their mortgages exceeds the value of their home.
Interest rates on this type of mortgage are typically one per cent higher than on other mortgage deals. And, without rising equity brought about by rising house prices, these homeowners will effectively be trapped in their homes.
Furthermore, while other homeowners with substantial equity in their home can look for more cost-effective mortgage deals, those with 100 per cent mortgages will not be able to do this.
Fool.co.uk claims that first-time buyers on 100 per cent repayment mortgages may only have 3 per cent equity in their homes at the end of their current 100 per cent deal and that it could take up to 34 months to build 5 per cent equity in their homes. And the situation could become much more serious if prices take a tumble.
However, there are some ways for first-time buyers on 100 per cent deals to help themselves. “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,” said Mr Kuo.
Get more information on a 100 per cent mortgage
or first time buyer mortgage