Posted 14 October 2016 by Ben Salisbury
The 100% mortgage is rare compared to other mortgage types, particularly since the credit crunch of 2008 which led to mortgage providers insisting on bigger deposits with stricter lending criteria.
Before the credit crunch, these were sometimes known as self-certification mortgages where the borrower declared their own income, particularly if they were self-employed.
However, this was one of the reasons for the huge crisis of sub-prime lending, that some banks were lending to people without carrying out the necessary affordability checks, lending to individuals who did not have the means to repay the loans. One of the lessons the industry went through in the aftermath of the crisis was the Financial Conduct Authority (FCA), formerly the Financial Services Authority (FSA), imposed stricter rules around mortgage lending to lower the risk of this happening again.
100% mortgages are rare but there are usually one or two options for 100% mortgages available, even though the market is constantly changing and individual deals come and go
What is a 100% mortgage?
A 100% mortgage is a mortgage that requires no deposit. The lender will let a mortgage applicant borrow the entire amount they need based on the price of the property they want to buy. The advantage for the borrower is that they do not have to have any savings in place to put down as a deposit. If you are a first-time buyer struggling to save up a deposit, this type of deal can seem very appealing.
However, lenders are reluctant to cater for 100% mortgages because of the high level of risk they carry. Because of this perceived risk 100% mortgages usually have higher interest rates linked to them. The more of a deposit you can raise the better the mortgage interest rate you will be able to unlock for what you borrow.
Why are they so risky?
The risk is strong because of the possibility of a fall in house prices. If a borrower borrows £200,000 for a house valued at that amount and the value of the property falls, the borrower owes more than the current value of the asset, plus the interest rate linked to the amount borrowed for the mortgage. This is called negative equity and it has been a big problem at different times in the UK’s recent history, particularly in the early 1990’s.
Being in negative equity makes it more difficult to move house or to be able to borrow again or remortgage to another deal. From the point of view of the lender, it means if you ever got into mortgage arrears, they wouldn’t be able to recoup all of their money by repossessing the property.
Because of the greater risk, interest rates attached to 100% loans are higher.
What are the 100% mortgage options?
A 100% mortgage is available through a traditional guarantor mortgage in which a family member agrees to act as a guarantor on your mortgage.
This means if you can’t meet your repayments and your home is repossessed, the mortgage lender will expect the guarantor to cover any losses. If the guarantor cannot cover the losses, their home could be repossessed as well, though their liability will be capped depending on the value of the mortgage.
Barclays launched its Springboard mortgage in May 2016 which lends 100% as long as a family member backs it. The borrower has to agree to save 10% of the property value in a savings account for three years, which acts as security for the mortgage loan. The mortgage rate is secured for three years at 2.99% and the family member will earn a rate of interest on the saving of the base rate plus 1.5%.
This is the first time a major lender has offered any type of 100% mortgage since before the financial crisis in 2008.
There are advantages to guarantor mortgages in that as long as the borrower meets the repayments it won’t cost the bank of mum and dad anything to be a guarantor and no-one needs to save up for a deposit.
However, in a worst case scenario, the guarantor could have their home repossessed if the mortgage repayments are not kept up.