Negative equity warning
Updated on 08 October 2007
One in 20 first-time buyers could become stuck in their homes if house prices fall, it has been warned.
About 5% of people taking their first step on to the property ladder take out a 100% mortgage, meaning they have no equity in their property.
Financial website Fool.co.uk warned these buyers were very vulnerable to a downturn in house prices, as only a slight fall in the cost of property would push them into negative equity.
This would make it hard for people to sell their property, as they would have to pay back more to their mortgage lender than they made on the sale.
The group added that interest rates on these loans tended to be higher than ones charged on other mortgages due to the higher level of risk involved.
But if house prices stagnated, first-time buyers with one of the loans may find they still do not have enough equity in their property to move on to a more competitive loan when their 100% deal ends.
David Kuo, head of personal finance at Fool.co.uk, said: "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."
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