A leading lender plans to launch a 100% mortgage aimed at would-be first-time buyers who cannot save for a deposit, the first since the 2008 financial crisis. They disappeared following the 2008 financial crash but 100% mortgages are back with lender Skipton having launched a new no-deposit product. We explain what this means for first-time buyers and whether you can get one.
What is a 100% mortgage?
A 100 percent mortgage is a loan taken out for the entire cost of the property. These loans are also sometimes referred to as no-deposit mortgages, 100% loan-to-value mortgages or 100 LTV mortgages. LTV is the percentage of the amount you’re borrowing compared to the property’s value. If your property is valued at £150,000, a no-deposit mortgage would mean you’re borrowing the full £150,000 from the lender and not putting in any of your own cash up-front.
Why are 100% mortgages so rare?
In 2008, mortgage regulations became stricter, as regulators identified that high numbers of applicants were being approved for 100% mortgages that they could not afford and then ended up missing payments and even losing their property.
The stricter regulations have forced lenders to perform a more comprehensive affordability check on applicants and the request for a deposit helps to prevent a situation where there is negative equity. Negative equity, where the outstanding mortgage loan amount is higher than the value of the property, is a bad situation for both the lender and the homeowner, as they both stand to potentially lose out financially.
What are the advantages of a 100% mortgage?
- You can buy your first home sooner, rather than waiting until you have saved up a deposit.
- If house prices are rising, this means buying at a lower price.
- Once you’re on the property ladder and paying your mortgage each month you’ll start to repay some of the debt. This means you’ll be building up equity in your property sooner – rather than wasting money on rent.
- Unlike with a guarantor mortgage, your family is left out of the arrangement. This could avoid damaging relationships if you get into financial difficulties and default on the loan. It also means their money is not put at risk and their ability to borrow is not compromised.
What are the risks of a 100% mortgage?
- If you have little or no deposit, even with a guarantor you’re likely to be paying higher mortgage rates so your loan will be much more expensive.
- There are much fewer lenders to choose from which can also mean less competitive rates.
- If property prices fall, you’re at greater risk of your mortgage being worth more than the total value of your home, known as negative equity. If you’re in negative equity it will be very difficult to remortgage to a different lender or to find competitive mortgage rates.
At the moment the offer is only available to first-time buyers, and is subject to affordability and applicants’ credit scores, as well as a good track record of rental payments over at least 12 months. For further information on what is a 100% mortgage and can I get one, please contact us here.
