100% mortgages: too good to be true?

What is a 100% mortgage?

A 100% mortgage is a type of mortgage where you borrow the full amount of the property you are buying. For example, if the property you want costs £240,000, you would borrow £240,000.

In recent times, most lenders have insisted you have at least a 5% deposit if you want to apply for a standard mortgage.

Conversely, the majority of 100% mortgages, or no-deposit mortgages, tend to be what are called guarantor mortgages or family-deposit mortgages.

This is when a relative or friend agrees to using their own savings or house as security against the mortgage.

Why are 100% mortgages in the news again?

In May, it was reported that Skipton Building Society is offering a new 100% mortgage product.

Unlike other no-deposit mortgages on the market, Skipton’s home loan will not need a guarantor.

Other key highlights of Skipton’s offer include:

• A five-year fixed deal with a 5.49 % rate and a maximum term of 35 years

• Buyers can borrow up to 4.49 x their income

• Maximum loan of £600,000

• Only available to first-time buyers who are renting

• Buyers need proof of paying rent for at least 12 months continuously with no missed payments within the last 18 months

• Applicants must be 21 years old or over

• Can’t be used to buy a new build flat

• Buyers must have 12 months evidence of paying all household bills within the last 18 months

Skipton’s new mortgage product may not be suitable for everyone because of the rigorous conditions that apply. However it could help responsible renters turn into first-time buyers, provided they fit all the eligibility criteria.

What are the benefits of getting a 100% mortgage?

It’s understandable why some people are happy that 100% mortgages are available again. Here are some of the upsides with this type of home loan:

No need for a deposit: Arguably one of the biggest barriers for people trying to get on the housing ladder is property prices. According to the Office of National Statistics, the average house price was £288,000 in February 2023, which is a £16,000 increase from 12 months ago. Statista also reports the average UK rent to be £1119 in April 2023 which again has risen from £1091 in the previous year.

Put simply, it can be difficult for first-time buyers to save up for a home because of how much houses and paying rent costs. So, the option of no-deposit mortgages, could be a lifeline for those who are struggling to save up for a home.

Foot on the property ladder: Once you start making mortgage repayments, you’re already beginning to pay off the loan. The good news with that is you’ll be building up equity into your new home.

Avoid family feuds: If you take out a 100% mortgage with Skipton, you won’t need a guarantor. This means you can avoid damaging family relationships in the event your guarantor mortgage goes sour.

What are the risks of a 100% mortgage?

If you think 100% mortgages sound too good to be true, you’re not necessarily wrong. This type of mortgage comes with a lot of risk and shouldn’t be taken out on a whim. Here’s what to be careful of:

Steep mortgage rates: The general rule is that the smaller your deposit, the higher your mortgage repayments will be. By extension if you don’t have a deposit at all, your monthly payments will be more expensive compared to someone who has built up a bigger deposit. If you want a no-deposit mortgage, you have to seriously ask yourself if you’ll be able to keep up with the payments, because defaulting on a mortgage can get you in serious financial trouble.

Lack of lenders: Most lenders aren’t offering 100% mortgages, which means the rate on the no-deposit mortgages won’t be as competitive and there won’t be many options to choose from.

Negative equity: When you get a no-deposit mortgage, you’re essentially buying a property without any stake in it. If house prices fall, then you risk your mortgage being more than the total value of your house and this is known as negative equity. When you’re in this position, it makes it very hard to remortgage. It’s also harder to sell your home and get competitive rates from lenders.

Why did lenders withdraw 100% mortgages?

In 2008, there was a global recession triggered by deregulation in the financial sector. Before the downturn, high street lenders such as HSBC and Lloyds were offering 100% mortgages.

These home loans were wiped from the market following the financial crisis.

Furthermore, it then became more difficult to be approved for a mortgage, with major lenders requiring bigger deposits from borrowers.

The revival of no-deposit mortgages is most likely due to the lack of affordable options for first-time buyers.

However, in view of Skipton’s rigid lending criteria for this product, it does appear that lessons have been learnt by mortgage providers.

That said, the nature of the product means borrowers should still very carefully evaluate the risks before applying.

Are there alternatives to 100% mortgages?

If you don’t think a no-deposit mortgage is right for you, the good news is that it isn’t the only way to purchase a property. Here are some other options:

Gifted deposits: If you’re very lucky you might have a family member who is willing to give you a cash deposit towards your first home. When you go down this route, they won’t be a guarantor or liable for your mortgage repayments.

Lifetime ISA: A successor to the Help to Buy ISA, a Lifetime ISA is another way you can build up a house deposit. This is a government-backed scheme where you can save a maximum of £4,000 a year. When you save for a house with a Lifetime ISA, the government will top up your savings by 25%. You can even combine your Lifetime ISA with someone else, which can help you get on the property ladder faster as well as creating a sizeable deposit. However, a LISA comes with some caveats such as an age limit until you can open one and how much your property can cost.

95% mortgages: With this type of home loan, you need to raise a deposit of 5% of the property’s value. With this mortgage, you’ve got at least some equity in your property. However it’s still a low deposit, meaning you won’t be offered the best mortgage rates.