Full Mortgage Financing: Is It Really 100% Financing for a Home?

Why Is 100% Financing Needed at All?

The core idea behind a mortgage — that is, the assistance banks provide for purchasing apartments — is that buying a property solely with your own equity is too expensive.
In the past, mortgage banks offered loans covering up to 50% of the property’s value, enabling buyers to raise the necessary equity to complete the purchase.
However, as property prices increased, so did the portion buyers had to present to the mortgage bank as equity.
As a result, laws changed, and today mortgage banks allow loans up to 70% of the property’s value.
But property prices kept rising, and even 30% equity is often more than many people can provide.
Therefore, many seek ways to circumvent the law and obtain full financing for the property, which is possible through several methods.

Getting a Loan to Cover the Equity: Equity Loan from a Commercial Bank

Opposite the mortgage bank stands the commercial bank, which also grants loans.
However, loans from commercial banks differ fundamentally from mortgages — they are usually smaller, have higher interest rates, and importantly, can be used for any purpose.
Because these loans are smaller and more expensive, it is not advisable to take a commercial bank loan for a large amount like a real estate purchase, but there is another method to combine both banks to achieve full financing.
To do this, you take a loan from the commercial bank for the equity amount required for the mortgage.
In most cases, there is no communication between the commercial bank and the mortgage bank — and even when there is, they are not overly concerned about the double loan.
Thus, it is possible to take out both loans without interference, achieving full financing for the apartment.
In addition to commercial bank loans, there are other sources for equity loans that may even help reduce repayment costs:

• Mortgage loans from funds
• Mortgage loans from insurance companies
• Mortgage loans from credit companies
• Mortgage loans from private companies

Second Mortgage: Pledging an Existing Property for Equity

Another solution for financing the required equity for a mortgage is using a second mortgage.
This is possible for someone who already owns a property, or someone who can help and owns a property, like family members or parents.
To do this, you apply to the mortgage bank for a mortgage on the existing property.
With the mortgage amount received, you can finance the equity needed for the mortgage on the new property.
Unlike the previous case, here there may be a direct connection between the two loans since both might be taken from the same mortgage bank.
Still, it is unlikely the bank will object since both properties are collateralized to the bank.
If needed, the property values cover the repayments, minimizing the bank’s risk.

Why Not Take a 100% Financed Mortgage?

Although for many people buying a property with 100% financing might be the only way to purchase a home, it doesn’t mean it should be the preferred route.
Full financing methods carry high risks due to the use of two or more separate loans.
Someone who doesn’t fully understand the process will need a lot of luck to avoid getting tangled in the repayments.
The main risks and challenges that may harm buyers who obtain 100% financing are:

• Extremely high repayments: Regardless of the method used, monthly repayments will be very high.
  With careful planning and creativity, some repayment relief might be found by sourcing loans for the equity with lower interest rates or by shortening the repayment period for the equity loan compared to the mortgage term.
  Still, there will be a period when the buyer must make payments on two or more loans monthly.
  Such payments are especially high, and without very stable finances, the whole plan may collapse.

• Income reduction: A drop in income turns these high repayments from a challenge into a problem.
  When taking a mortgage, the bank ensures the borrower can afford the payments based on their income.
  However, repayments for the other loan(s), like the commercial bank loan or second mortgage, aren’t included in this calculation, leaving the borrower more vulnerable than the mortgage bank would like.
  Thus, any small negative change in income can significantly impact the borrower’s ability to meet payments.

• Failure to meet repayments: What really happens if one can’t keep up with repayments?
  In a mortgage based on equity, the mortgaged home is taken by the bank to cover debts, and that usually settles the matter.
  This is unpleasant but straightforward.
  In 100% financing cases, if the equity was financed by a loan, that loan still requires payments even after the home is repossessed.
  This leaves buyers both homeless and still paying monthly.
  In the case equity is financed by pledging an existing property, if payments fail, the owner of that property (if different from the new property buyer) will have to cover repayments out of pocket.
  If they cannot, or if the buyer also owns the pledged property, it will also be repossessed.

• Decline in property value: Another problem arises if the property value drops.
  While prices have been rising for a long time, there are increasing claims that the market is a bubble about to burst.
  If that happens and prices fall, the mortgage debt might exceed the property’s value.
  This is problematic for the borrower, who cannot leverage the property value to manage repayments, and even more so for the market as a whole, when more people struggle to pay their debts.

What to Check Before Taking Loans Covering 100% of the Property Value

For those willing to take the risk of borrowing 100% of the property’s value, it is wise — and advisable to consult an expert — to consider these key points:

• What will be the monthly repayments: Based on the total loans taken and required payments for each.
• How stable is the income: What are the chances of income changes, the likelihood of finding alternative income sources if the current one is lost, and what the replacement income might be.
• Expected changes in the real estate market: While important for any real estate deal, this is especially critical when seeking 100% financing.

This is because with 100% financing, the borrower is far more vulnerable to property value declines, and because it might be possible to avoid needing full financing if property values are expected to fall.