Word on the street is that 100% mortgages are back – but what exactly are they, how do they work, and could they ultimately be more trouble than they’re worth? Our in-house experts are here to take you through the pros and cons of this controversial mortgage product:
For first-time buyers in the UK, the dream of owning a home can sometimes feel out of reach. Whilst many mortgage options and schemes require deposits as little as 5%, in today’s economy, even saving for a deposit as small as this can seem impossible.
That’s where 100% mortgages come in – enabling buyers to secure a mortgage without any deposit at all. That’s right, these mortgages cover the entire purchase price of properties, helping buyers get on the property ladder with little to no savings.
100% mortgages, though a rare option for buyers today, were a hugely popular product in the early 2000s, with some packages offering buyers up to 125% of property value. Unfortunately, this ‘easy credit’ way of lending ultimately contributed to the 2008 financial crash. As a result, post-recession, borrowing criteria has become tighter than ever.
These days, lenders typically ask for a minimum deposit of between 5 and 10%, however, as of 2023, there are ‘100%’ options available. The latest lenders to dip their toe into the world of super low deposit mortgage products are Skipton Building Society, who recently launched their ‘Track Record’ offering, allowing applicants to borrow from 95% to 100% of their property’s value.
Whilst Skipton Building Society’s Track Record scheme has seen the most press coverage this year, there are other 100% options out there, with Barclays offering a 100% Family Springboard Mortgage (in which a family member of the applicant is is required to deposit 10% of the purchase price into a savings account, which remains untouched for five years), and Loughborough Building Society launching a Family Deposit Mortgage, which lets family members deposit a cash lump sum into a designated account or agree to a legal charge on their own home).
If you’re considering a 100% mortgage, it’s essential to double-check your chosen lender’s criteria. Although those offering this product are willing to take on the higher risk associated with lending the full purchase price, they’ll need some evidence as to your ability to repay them.
In most circumstances, their requirements may include having a good credit history, demonstrating stable employment, and being able to afford the monthly repayments based on your income and expenses. In addition, you’ll need to be able to cover the other costs associated with purchasing a property, such as broker’s (if applicable) and legal fees.
Of course, the exact list of boxes you’ll need to tick will vary depending on your exact product and lender. For example, Skipton Building Society applicants must:
Their mortgage application must also meet the following standards:
The British public are sceptical of 100% mortgage schemes for a reason. In such a volatile housing market, with the risk of negative equity ever-looming, are 100% mortgages really worth it? Our experts weigh in:
There’s no argument that the biggest advantage of 100% mortgages lie in their name. Being able to buy a home without a large deposit proves hugely useful to first-time buyers who might otherwise find it challenging to save up whilst paying rent and managing living expenses.
The sooner you get on the property ladder and start building equity, the better. By eliminating the need for a deposit all together, 100% mortgages remove one of the biggest hurdles to homeownership, helping first time buyers skip the time it takes to save a deposit, and get their foot in the door before prices rise further.
In order to protect their interests, lenders offering 100% mortgages are likely to subject their applicants to a relatively strict list of criteria, as seen above with Skipton Building Society. You’ll likely need to be a first time buyer, will be required to prove your income/financial stability upfront, and might face restrictions when it comes to your overall term, loan to income ratio, loan total, and even property type.
Though 100% mortgage lenders are more willing to take on the risk of covering property prices in full, they often compensate for this by offering less favourable terms or higher interest rates than traditional mortgages. This likely means that your monthly payments will be higher than they would be if you’d put down a deposit. If this is a big point of consideration for you, we highly recommend seeking a mortgage broker well-versed in the needs of first-time buyers to weigh in on your options.
Negative equity occurs when the value of your property falls below the outstanding balance on your mortgage. Naturally, with a 100% mortgage, there’s a much increased risk of this happening, especially if property prices in your area happen to decrease. It’s important to consider the potential long-term implications and have a contingency plan in case you plan to sell.
100% mortgages aren’t the right choice for everyone. Whilst purchasing a house with no deposit can be an appealing option, most providers highly recommend opting for a 95% mortgage product or alternative if you have the financial means to do so. Some even accept gifted deposits! Here’s a quick rundown of the other first time buyer options you’re likely to come across in your search:
Shared equity mortgages, also referred to as ‘partnership mortgages’, are a financial product designed to help people who may not otherwise be able to purchase a property. They’re most often available through government-backed schemes, but may also be offered on a private basis by developers.
With a shared ownership mortgage, you have the opportunity to buy a portion (share) of a property (typically ranging from 25% to 75%). The remaining share is owned by a housing association or developer. This ownership split means that you’ll only need to take out a mortgage for the share you’re purchasing, keeping your deposit payment to a minimum.
After getting your keys, you’ll make monthly mortgage payments on your share of the property, and pay a subsidised rent to the housing association for their share. The best part? Shared ownership allows you to purchase more of your share over time, increasing your mortgage payments and equity whilst decreasing your rental payments.
At the end of the specified mortgage term (usually 25 years), if your loan hasn’t already been paid off, you’ll be required to settle it in full – with the amount to be paid pack being ‘proportionate to the value of your property at the end of the term’. This does mean that you could end up paying back more than you borrowed – but for many, the benefits of shared equity mortgages outweigh this risk.
As their name suggests, 95% mortgages require a smaller-than-average cash deposit – with just 5% of the property value to be paid upfront. This lessened upfront cost makes 95% mortgages a great option for those unable to save for a large deposit, those with a small amount in savings and looking to purchase a property quickly, or for first-time buyers.
In comparison to 100% mortgages, submitting just a 5% deposit will unlock a significantly higher number of lenders and deals, giving you more flexibility when it comes to rates, and added protection against negative equity – though, of course, the higher the down payment the better.
Finding the right mortgage option can be an incredibly difficult process, especially for those buying for the very first time. Mortgage brokers like us are here to help.
If you’re in need of some extra guidance, are unsure as to whether or not a 100% mortgage is right for you, or would like to buy but don’t know where to begin, a broker could be the answer. Fees Free Mortgages are proud to provide a fee free advice and broking service. We specialise in helping first time buyers find their footing on the property ladder, and would love to see you through your application at no added cost.
To discuss our services, or for free mortgage advice contact us today, visit us in our flagship branch, or reach out to your local advisor. We’ll be happy to help!