The return of the 100% mortgage

Saving for a deposit for a first home has become very difficult due to the high cost of living. This has prompted mortgage providers to launch home loans where you do not have to put down a deposit at all, and you can borrow all of the money needed to buy a property.

If this sounds familiar, that is because 100% mortgages are not a new concept. They were popular right up until the financial crash of 2008, and in some cases, borrowers could even borrow more than a property’s purchase price so that they could have some money left over to pay for legal fees and even furniture and fittings.

After the crash, lenders tightened their criteria, and 10% deposits became the norm. So why is the 100% mortgage back now, and how is it different?

100%, with a twist

Today’s 100% mortgages are somewhat more complicated than those we were familiar with before 2008. While a deposit may not be required, there are usually other stipulations that must be met to protect the lender against losing their money if prices were to fall or the homebuyer defaulted on the mortgage.

Skipton Building Society’s 100% mortgage, launched this month, is perhaps the most comparable to 100% mortgages of old. Called a Track Record Mortgage1, it is available to those who have a track record of paying 12 months of rent in a row during the past 18 months, as well as being responsible for all utilities. Those who take out the mortgage must be first time buyers and the mortgage is fixed for five years. At present the mortgage rate is 5.49%, above the average for five-year fixed rates.2

An alternative for those with no deposit include Barclays’ Family Springboard mortgage, which allows a family member to effectively use their savings as a guarantee so that you can buy a home without a deposit.

Why 100% mortgages now?

With rental costs so high, many renters are struggling to save for a house deposit while paying rent at the same time. A 100% mortgage releases them from this situation, with the Skipton product taking their financial competence as renters into account when deciding whether an applicant is ready to borrow money.

These, and guarantor mortgages, are supposed to provide a halfway house between the 100% mortgages of the past and the difficult option that is saving for a 10% deposit.

However, there are dangers inherent in 100% mortgages, and so you need to be clear about what you are going into if you take one of these out.

  • You risk negative equity
    One of the reasons why house deposits are required by lenders is that they give everybody a buffer against negative equity, which is when your house is worth less than the loan you have on it. Borrowers in negative equity can end up stuck in their homes because they cannot sell the property and pay back what they owe. House price growth appears to be softening slightly4, and further rate rises could push prices down, so this is a real risk.
  • You do not get such competitive rates
    Generally, the more of a deposit you can put down on your property, the lower the interest rate you will pay. Over time this can make a huge difference to your payments. For example, if you have a 10% deposit, you could access Nationwide’s 4.44% rate fixed over five years.

That product, which comes with a fee of £999, would cost you £29.952.50 for a £218,000 mortgage over two years according to Moneyfacts5. The Skipton mortgage, at 5.49%, would cost you £32,000 over the same period.

What are my alternatives?

If a 100% mortgage is not for you, or you cannot access one as you do not have a track record as a renter, there are other ways to help yourself onto the property ladder.

The Government’s Lifetime ISA product can help you to save for a deposit, by offering a bonus on top of the amount you save, provided you put the money towards a first home or towards retirement.

You can put up to £4000 into a Lifetime ISA every year until you are 50, but you must start paying in before you are 40. The government will add 25% as a bonus to your savings up to a maximum of £1000 a year.

This can help your deposit grow more quickly, but you need to be aware that the money can only be taken out to buy a first property worth up to £450,000, and if you do not use it to buy this you will have to wait until you are 60 to access the money or face penalties that cancel out the government bonus you have received. There are more details on the Government Lifetime ISA product here.

If you can find a 5% deposit, the Government’s Mortgage Guarantee Scheme can help you to get on the property ladder. This scheme gives lenders a government guarantee when providing 95% mortgages, meaning that they can offer these products at more attractive rates without fearing that too many people will default on the mortgages. The scheme was extended for a further year in December 2022, so these mortgages can still be accessed.6

Other initiatives such as Shared Ownership and the First Homes scheme for first-time buyers can also help in some cases. Shared Ownership allows you to buy a share in your home and pay rent on the rest. While this can make home ownership a reality more quickly, it can also make it harder to sell a property if you do not own all of it.7

The First Homes scheme has some restrictions but can offer a 30% discount on prices to those eligible. There is more information on the government website, here.

There is no doubt that being a first-time buyer in today’s market is hard work, and 100% mortgages give those in rented accommodation another tool in their armoury if they are hoping to buy a property. Mortgage brokers and other experts can help you to find the most suitable option for you taking into account your personal circumstances and risks involved.

This article should not be construed as financial advice. The products referenced in this article are given as examples of mortgage products available on the market at this time and are subject to change at the discretion of the mortgage provider. It is important to remember that a mortgage is secured against your property and that your home is at risk should you not be able to keep up with repayments.

To discuss any of the products mentioned in this article, or for any questions about your mortgage options, speak to a financial adviser today.

Thursday 29 June 2023