Buying a house with no need to provide a deposit? Sounds too good to be true, right? Having to stump up thousands of pounds to provide 10% or 5% of a property’s value in order to get a mortgage from the bank is a daunting prospect for many would-be home buyers. But a newly resurrected concept can help – the 100 percent mortgage.
Prior to 2008, many banks would offer 100% mortgages in the UK, and then the financial crash happened, and crashed the party for everyone. 100% mortgages were removed from the market, and the Financial Conduct Authority introduced affordability rules. The idea behind this was to make sure people couldn’t borrow more than they could afford to pay back. The affordability rules were scrapped, and Skipton Building Society was the first to offer 100% mortgages in May 2023.
Buying a house with no need to provide a deposit? Sounds too good to be true, right? Well, 100% mortgages are not without potential pitfalls, but with careful forward planning, you can take full advantage of them. Here we will take a look at what 100% mortgages are, how you can access them, and the potential pros and cons for this type of mortgage.
A 100% mortgage, also known as no-deposit mortgages, is where a bank or building society will provide you with the entire value of a property. They are ideal for first-time buyers, but you don’t have to be a first-time buyer to secure a 100% mortgage. In the shadow of the cost of living crisis, this could be a boon for those who want to be homeowners but cannot save up for a deposit. With deposits ranging from £30,198 in the North East to an eye-watering £125,378 in London, it’s understandable that many consider home ownership to be a pipe dream.
A 100% mortgage won’t cover every cost associated with buying a house. You will still need to come up with the cash for solicitor’s fees, surveys, and more. The financial journey of purchasing a home with a 100% mortgage still demands careful planning and budgeting for these additional expenses.
Most 100% mortgages are provided only with the addition of a guarantor, or someone who vouches for the buyer’s ability to pay back the mortgage. Family deposit mortgages are the most common form, where a family member or close friend commits their own money or property equity as security for the mortgage. This way, if the homebuyer defaults on their mortgage payments, someone else will have to pick it up.
Most mortgage providers look at the buyer’s income, credit score and any debts when deciding how much money they can lend them for a mortgage. Skipton’s ‘track record’ mortgage takes a more holistic view of a person’s financial situation, including whether they have paid their rent in full, on time for the last 12 months. This can help potential homebuyers break out of the rental cycle and get on the property ladder. As well as Skiptons, Halifax Building Society, Mansfield Building Society, and Lloyds Bank are offering 100% mortgages.
The obvious benefit of 100% mortgages is that no deposit is required. For many UK dwellers, saving up tens of thousands of pounds can take years, and they still might not have enough to buy a house in their desired location. Meanwhile, all their hard-earned cash goes on ever-rising rent, leaving them poorer than ever. 100% mortgages give them the chance to achieve their dreams of home ownership. More benefits include:
Jumping on the property ladder
At a time when property values continue to rise, buying a home can give you a good start on the property ladder, meaning that they can benefit from future increases in house prices. You can start off with a modestly sized property and then after a few years, use that as a springboard for a more extravagant home.
Build up home equity
As you make more and more mortgage payments, the equity you have in your property rises over time. Once the introductory period of the mortgage comes to an end, you will be in a good position to negotiate for a better deal.
Cheaper than renting
In many cases, monthly mortgage payments can be cheaper than renting. It makes sense – after all, the mortgage goes straight to the bank instead of middle men like landlords and property management companies who all want their cut.
The main problem with 100% mortgages is the risk of falling into negative equity. This is what happens when the value of a property falls, and you now owe more money than the property is worth. This is bad for both mortgage providers and homeowners – no-one wants to be stuck with a property they can’t sell. This is one of many factors that precipitated the 2008 recession.
More risks include:
Higher interest rates
Rates tend to be higher on 100% mortgages as the bank is taking a bigger risk by lending the money. Skiptons Track Record mortgage is fixed at 5.89% for 5 years.
Personal relationships can take a hit
Asking a family member or friend to be a guarantor can be a difficult question, and requires some serious consideration by all involved. The guarantor might not be able to access their own savings for a period of time if they put them up as collateral, and if you don’t make the mortgage payments, your relationship could be damaged..
Limited mortgage options
Currently, only a handful of providers are offering 100% mortgages, meaning that your options will be limited. This can make it harder to find a good deal. Being able to provide even 5% of the property value opens up way more options for potential home buyers.
Stricter lending rules
The mortgage provider is taking a bigger risk by lending the money for a 100% mortgage. This means they can come with stricter lending requirements, especially for buyers with low incomes or poor credit scores.
Much like ordinary mortgages, the amount that you can borrow on a 100% mortgage depends on your individual circumstances. Things like income, spending, and credit score will be taken into consideration, plus any existing debts. Most banks will not lend more than 4.5 times the cost of the household income on a mortgage, so say if the combined income of a couple is £60,000, they will not be able to borrow more than £270,000. 100% mortgages will cover the cost of the property and no more, so you should be prepared to cover the costs of conveyancing and surveys yourself.
If the cons of the 100% mortgage are too offputting, then there are other options for those looking to buy their first property.
The Mortgage Guarantee Scheme
This is a government-backed scheme that allows for potential home buyers to put up a 5% deposit on a property, while mortgage lenders will be compensated in the event that the buyer defaults on payments and the property is repossessed. This scheme ends in December 2023, so anyone wanting to take advantage of this scheme should move quickly.
Help To Build Equity Loan
For those wanting to borrow money to build their own home, this government scheme offers 5% and 20% of the estimated land and building costs (up to 40% in London). This does require the buyer to have already secured a self-build mortgage from their provider.
Shared Ownership
Part of the government’s Help to Buy scheme, a shared ownership allows buyers to buy a part share in their home from a housing association, and pay rent on the portion they do not own. This option does require a deposit on the portion the buyer owns, but it will be less than a traditional deposit. After living in the home for a while, buyers have the option of ‘staircasing’, or buying more shares in the property as and when they can afford to do so.
Gifted Deposits
Some buyers might be lucky enough to receive a gift in the form of a deposit for a home from a friend or family member. Gifted deposits however must be declared at the point of the mortgage application, and there may be a limit as to how much of the deposit can be gifted.
New-build Developer Loans
Some property developers offer the option of loans to use as a deposit for a property they have built. This is then paid back over a predetermined time period. This is in addition to the cost of the actual mortgage, so buyers should make sure this is financially viable for them.
In summary, the 100% mortgage could be a great way for first-time buyers to get on the property ladder and start building equity, but you should always be mindful of the potential risks involved. Seek professional advice, take a close look at your current financial situation, and take the time to shop around for the best deal.
In summary, the 100% mortgage could be a great way for first-time buyers to get on the property ladder and start building equity, but you should always be mindful of the potential risks involved. Seek professional advice, take a close look at your current financial situation, and take the time to shop around for the best deal.
We hope this article has shed some light on 100% mortgages and the benefits and drawbacks thereof.
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