One in five new borrowers is taking out a mortgage worth at least 95 per cent of their property’s value.

With interest rates and house prices continuing to rise, many probably see this as the only way to get on the property ladder.

But I wonder how may are aware of what this could cost them?

Spicerhaart Financial Services says high loan-to-value mortgages are in greater demand than ever before.

Last month, 19 per cent of new borrowing fell into this category, compared to just 9 per cent at the start of the year.

Spicerhaart operations director Steve Cox observes: “There is no doubt that affordability is becoming a problem for the majority of homeowners.”

Indeed, but borrowing such a high proportion of their property’s value is not the answer.

Interest rates on 95 to 100 per cent mortgages tend to be higher, which means these borrowers are more likely to get into difficulties, especially if rates continue to rise.

Most loans of 90 per cent and above also come with a hefty higher lending charge (also known as a mortgage indemnity guarantee) – around £1,500 is typical for every £100,000 borrowed.

Whether you pay it up front, or add it to the loan – and pay 25 years of interest on it – an HLC is money down the drain.

And what happens if, as many commentators are suggesting, the crazy growth in property prices comes to an end or, God forbid, they fall?

Borrowers with high loan-to-value mortgages could soon find themselves facing the horror of negative equity.

Sell for less than you owe and the additional debt will haunt you for years, making it hard to afford another mortgage.

Default on it, and you’ll be in a whole other sort of trouble – and your credit rating will be wrecked.

Surely it would be cheaper in the long run to save a little more, borrow from family or even take a low-rate personal loan to avoid that wasteful HLC – and keep your mortgage debt down to a safer level?

This entry was posted on Tuesday, July 17th, 2007 at 11:03 am and is filed under UK Mortgages, UK Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.