It’s back! The return of the 100% mortgage
First published 16 May 2016 • Updated 13 June 2019
The prospect of obtaining a deposit-free mortgage has got prospective home-buyers very excited. But what do you need in order to take advantage of this springboard onto the property ladder? Article by Nick Green.
If you’re struggling to get on the property ladder, you’ll know all about this infuriating catch-22. Which is: it’s usually more expensive to rent your home than to buy it. Every month you pay out far more than you’d need for mortgage repayments – and then that money is gone, helping to buy someone else’s long-term investment. Meanwhile, you can’t raise enough money for a deposit on your own property, because you’re paying so much in rent. And lenders won’t give you a mortgage without that hefty deposit, even though you can prove your ability to keep up repayments (because you’re paying almost twice that much now).
It’s just not fair, is it? Would-be homebuyers are left stuck in a rut, seemingly doomed to rent forever because a deposit is always out of reach.
Why are 100% mortgages so rare?
It wasn’t always like this. Back before the financial meltdown of 2008, it was commonplace for lenders to grant mortgages with no deposit at all – or even mortgages that loaned more money than the property was currently worth. Of course everyone knows how that ended, which is why mortgage providers ever since have been more strictly regulated and wary of making ‘bad loans’.
We’ve gone from one (disastrous) extreme to the other. But common sense suggests that there must be a moderate, middle way that allows people to buy homes if they can afford them, without causing Financial Apocalypse Part 2. And now, at last, lenders seem ready to try it.
The new 100 per cent mortgage (with a twist)
Barclays has become the first mainstream lender since the credit crunch to offer a mortgage with no deposit, and it’s likely that others will be quick to follow. Currently borrowers need to provide at least 5 per cent of the purchase price, which at the average UK property price is still around £10,000 (while for London it’s more like £27,000). The new 100 per cent mortgage will enable homebuyers to borrow the full amount. However, there is a catch.
A mortgage with a ‘temporary deposit’
The Barclays mortgage works by taking a ‘temporary deposit’ of 10 per cent, which must be provided by another individual (such as a parent or other relative). This money is placed in a special savings account for a period of three years, to provide security against a fall in house prices in the event that the buyer can’t keep up repayments. After that three years, the money can be withdrawn again.
Re-opening the Bank of Mum and Dad
Many first-time buyers are already forced to turn to their parents for help – but not every parent can afford to part with a deposit-sized lump sum. However, under the ‘temporary deposit’ model it’s little different from putting the money in a long-term savings account, provided the mortgage repayments are kept up. Barclays is even offering annual interest of 2 per cent on their deal. Parents who might once have had to sadly refuse can now help their children onto the property ladder at no net cost to themselves.
What are the risks of a 100% mortgage?
As with any mortgage, plenty of risks remain. The money in the special savings account is withheld until at least three full years of repayments have been made, so if you default during that time then your parents may not ever get their money back. All the normal risks and caveats of an ordinary mortgage would also apply, including the danger of going into negative equity if the property price falls - leaving you unable to repay the loan just by selling it.
What other mortgage options are available?
Similar 100 per cent mortgages are also available from some challenger banks and building societies, and there are also various high loan-to-value mortgages (up to 95 per cent) available, some of which also include an element of parental guarantee or under-writing. The signs are that slowly but surely, more options are emerging for first-time buyers to finally get a chance to buy their own home.
There are a range of guarantor mortgages and family deposit mortgages available too, which you can read about in this article: The Bank of Mum and Dad.
Remember, just because a mortgage looks ideal for you, does not always mean that it is. It’s prudent to talk to a financial adviser or independent mortgage broker before making any decisions. Finding the right mortgage for you will depend on many factors, and your adviser can also search the whole of the market to find the deal that suits your circumstances best.
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