What are 100% Mortgages?
In recent months, 100% mortgages have been reintroduced to the market, helping buyers to get on the property ladder. Offered by just one lender so far, it’s expected that other lenders will soon follow suit. But what is a 100% mortgage and how do they work?
100% mortgages, also known as zero deposit mortgages, allow you to buy a property without putting down a deposit. Normally, lenders expect you to contribute a deposit of at least 5 -10%. For example for a property valued at £250,000, you would need a deposit of £25000 (10%). The lender then puts up the remaining 90%, following an assessment of your circumstances including your income, current financial commitments and credit history. But with a 100% mortgage, the lender lends you the full value of the property with zero deposit required. It’s worth noting that 100% mortgages aren’t for everyone – they have more stringent criteria and they come with some significant risks.
Who are 100% Mortgages Tailored Towards?
100% mortgages can seem an attractive proposition if you are struggling to save a deposit and don’t have family who can help out. Many tenants feel trapped by the current rental market with its rising rents driven by high demand for rental property. And even if you earn a good wage, once you have deducted your rent and bills, there often isn’t much left over to save towards a deposit. Saving a big enough deposit can take years, which is frustrating when you feel you can afford the mortgage payments.
It can be especially tricky if you live in an area with higher-than-average house prices such as London. For potential first-time buyers, a 100% mortgage can be a lifeline. It allows you to achieve your home-buying goals much earlier than expected, whilst retaining a sense of independence.
What are the advantages of a 100% mortgage?
There are several advantages to choosing a 100% mortgage. Firstly, there’s no need to save a large deposit to get on the housing ladder. You can save if you want to but you don’t have to, or you can put your savings towards home improvements or new furniture. If the right property comes up, and you can afford the mortgage and pass the lender checks, the property is yours. Rental payments also tend to be more expensive than mortgage payments, so your monthly outgoings might reduce.
You’ll also be liable for the costs of maintaining the property so it’s important to budget for this as well. Plus you’ll no longer be contributing to your landlord’s mortgage and will instead be paying towards your own. There’s also the benefit associated with increased security when comparing buying to renting.
Why were 100% Mortgages Removed from the Market?
In the years leading up to 2008, 100% mortgages were much more commonplace. But after the financial crash, many lenders stopped offering these as they were considered higher risk. Originally, lenders offered 100% mortgages on the assumption that house prices would continue to rise. If the buyers were to default, the lender expected to get their money back by selling the property. But at the time of the crash, the market stalled and some properties went into negative equity (where the property value was lower than the mortgage).
The recession caused people to lose their jobs and they were then unable to make their mortgage payments. Lenders would repossess these properties, but then could not recoup the loss when they sold the property. This caused some banks, such as Northern Rock to go into administration.
Following the crash, the government regulatory bodies brought in further regulations governing mortgages. They wanted to ensure that lenders only gave mortgages to those who could afford them to prevent the issues experienced in 2008 from reoccurring. With the focus on lending responsibly and with interest rates low, many lenders simply stopped offering 100% mortgages.
More recently, with the rise of interest rates and with house prices more stable, there has been a gradual re-emergence of higher loan-to-value mortgages. More lenders are offering mortgages to those with smaller deposits, albeit with some strict rules and higher interest rates.
Are 100% Mortgages Risky?
As with all mortgages, there is an element of risk involved, and one thing to bear in mind is that lenders would be within their rights to repossess your property if you are unable to make your mortgage payments. This would have a detrimental impact on your credit file and your ability to get credit in the future, so it’s certainly worth weighing your current financial situation into your considerations.
If you decide to sell and property values reduce, you could end up in negative equity. You’ll then have to find the difference to repay your mortgage or be forced to keep the property and mortgage. Most lenders will offer up to 5 years for a fixed-rate mortgage deal. But when your deal ends, if your outstanding loan is not 95% of the value or less, this could limit your options when remortgaging to another lender.
The downsides of 100% mortgages
100% mortgages are not right for everyone and buyers should carefully consider whether they are right for them. In particular, there are several considerations that you should bear in mind:
100% mortgages tend to have higher interest rates
100% mortgages tend to be more expensive than lower equity mortgages and you could end up paying more in interest over the term. There’s also the risk of interest rates rising further after initial deals end which could limit your remortgaging options based on how much equity you have when the deal ends.
100% mortgages come with a risk of negative equity
Generally speaking house prices tend to rise, but if they do crash you could end up in negative equity which could make it difficult to repay your mortgage in the event that you sell..
100% mortgages are a limited offering at the moment
At the time of writing, only one lender provides 100% mortgages. It’s possible that depending on the success of these, other lenders may follow suit.
100% mortgages come with a risk of financial stress
It can be more stressful with the lack of equity weighing on your mind if the worst should happen.
Advice for Those Considering a 100% Mortgage
If you are considering a 100% mortgage, it’s important to speak to a mortgage advisor who can give you professional advice. Here at Simple Fast Mortgage, we’ve got a team of experts on hand who will be able to assess your current situation, allowing you to make an informed decision before considering a 100% mortgage loan. We can also help you with budgeting for your mortgage payments, and we will discuss the long-term implications of the 100% loan you’re considering. If it is a suitable option for you based on our findings,, we’ll carry out extensive research comparing the best deals available for your personal circumstances. Ifwe think a 100% mortgage isn’t in your best interests and another option is available, we’ll discuss it with you.
Get in touch with our friendly team to find out more.
Is a 100% mortgage right for me?
A 100% mortgage could be right for you if:
- You have an established history of renting
- Your income is sufficient to cover the mortgage payments
- You can’t save a big enough deposit for a mortgage
- You have a good credit history
- Are aged over 21
Ready to start your application? Contact us today and find out how much you can borrow.