The Return of 100% Mortgages
A 100% mortgage is a loan for the entire cost of the property you are buying. 100% mortgages were commonplace in the early 2000s, but relegated to history when the credit crunch hit in 2007. After this, mortgages for 100% began to rapidly disappear from the market. 100% mortgages were completely withdrawn from the market in 2008 and the negative equity it left people with has been a burden on many unfortunate homeowners ever since.
However, more recently a new wave of 100% mortgages had slowly evolved, albeit with a few fundamental differences.
The New 100% Mortgage
The 100% mortgages available nowadays retain the feature of allowing you to purchase your home without having to save for a deposit (naturally). However, to qualify for a new 100% mortgage, you are likely to need a third party to provide security for the loan by acting as a guarantor. This can be done in one of two ways.
Property as Security
A person can act as a guarantor by using their property as security against the mortgage or a proportion of it. So if you take out a loan for 100% of the property value, your guarantor might use the value of their own home as security against 25% of yours.
This is done by way of a legal charge which is registered on the guarantor’s home. This has serious legal and financial implications; it means the lender can pursue the guarantor for money if the you do not keep up repayments on your home. It could mean their house being repossessed and sold to pay off your debt.
Savings as Security
If a person uses their savings to guarantor your 100% mortgage, they put their savings in an account with the lender, where it’s held for a set number of years. If the guarantor has a mortgage of their own, your mortgage provider may impose a maximum combined loan-to-value of the mortgage and the registered charge of, for example, 65%.
This savings account may pay little or no interest and the guarantor won’t be able to withdraw any of their money until the term is up, so there is not much benefit for them.
Also, the lender has a legal charge over the money held which means it can be used to make up a shortfall if your property is repossessed and sold at a loss. A very risky business for all involved.
Talking of Risks…
The return of 100% mortgages has created a very specialised product with very low availability. Such limited choice means higher fees and charges and fewer deals to choose from.
Although you have the option to find a willing guarantor, nothing has changed in the risk of negative equity. If house prices fall, you could be paying a mortgage worth more than your house meaning selling or moving will be expensive.
Having put down no deposit on your home, your lender will most likely insist that you take out a mortgage indemnity guarantee. This is an insurance policy to protect the lender if you default on payments, but that you must pay for. Premiums on these can be expensive and benefits the lender more than the borrower.
On The Plus Side…
The obvious advantage of a 100% mortgage is that you are able to buy a home without having to save a deposit. Guarantors take the place of gifted deposits for a few family members who want to help you onto the property ladder.
Existing homeowners who bought their property during at peak prices with little or no deposit and have since fallen into negative equity might benefit also. A 100% mortgage could also help people in this situation sell up or remortgage when they’d otherwise be mortgage prisoners, maybe living in unsuitable properties paying very high rates of interest.
What of Negative Equity
A huge risk related to 100% mortgage is the trap of negative equity, where you owe more to your mortgage lender than your property is worth.
This could be a real issue if you needed to move home or remortgage. You would need to find money to cover the shortfall before you could do anything, trapping you in a home you no longer want to live in.
As you pay off more of your mortgage and own more of the equity, negative equity becomes less of a concern, but this is very much a long term situation. House prices may always rise too, but this is all like predicting the unknown and it’s fair to say that in the first few years of a 100% mortgage, the risk is significant.
Who Can Get A 100% Mortgage?
First-time buyers and current homeowners can be eligible for 100% mortgages. The number of products on offer is very limited so even if you have a family member who is willing and able to act as your guarantor, there’s no guarantee you will be accepted for one.
Lenders conduct a thorough analysis of your finances to work out your affordability and whether you can afford to make the repayments each month.If you have a bad credit score you are unlikely to qualify. Similarly, the amount of debt you have compared to your income will affect whether a lender will agree to a 100% mortgage.
Being self-employed is not a barrier to getting a 100% mortgage providing you can show consistent accounts for the last two to three years.
100% mortgage are not available on shared ownership properties. First time buyers are usually required to have a deposit of 5% so 100% mortgages are unlikely to be available to them.
If you cannot get a 100% mortgage or find a guarantor, you will need to put down a deposit of at least 5% before taking out a mortgage on the remaining balance. There are far more 95% mortgages available but while rates have fallen recently, they’re still much higher than if you put down a bigger deposit.
The obvious benefit of a 100% mortgage is that you don’t need to save a deposit beforehand. This can seem appealing, especially if you’re a first-time buyer and struggling to save.
But 100% mortgages are risky, and they are very rare in the current market. What must also be taken into consideration is that whilst you may be drawn to a 100% mortgages due lack of accessible savings to use as a deposit, there are many other kinds of fees to pay when moving house. There are mortgage fees, arrangement, booking, valuation fees, surveys, brokers and conveyancing fees.
One of the most prudent courses of action you can take is to contact a conveyancing solicitor (you can get conveyancing quotes online) and go from there. They will have extensive knowledge on house purchase transactions and will guide you in the right direction.