If you’ve been unable to raise a deposit to get onto the property ladder, here’s everything you need to know about 100% mortgages in 2022.
A 100% mortgage refers to a loan for the entire cost of the property you’re buying which means you’ll not have to put up any deposit. You’ll also find such loans being referred to as 100% loan to value (LTV) mortgages or no deposit mortgages.
If the property costs £200,000, a 100% mortgage would mean you’re borrowing the full £200,000 from the lender. 100% mortgages can appeal to first-time buyers who find it challenging to save, but they’re risky and very rare in the current market.
All mortgages have ratios of loan to value (LTV) that reflect the percentage of the property value you’re borrowing. 100% mortgages mean you’re borrowing for the entire property value and now come with far stricter conditions than they did previously.
Following the financial crisis in 2008, lenders were forced to pay more attention to every borrower’s entire financial situation and not just how much they earn.
If you’re qualified, you’ll make monthly repayments over an agreed term, but you’ll likely pay higher interest rates because you have no equity in the home. You can get lower LTV and better deals from lenders with more equity.
Currently, most 100% mortgages in the market are guarantor mortgages. These come in different forms, but all rely on you having a friend or family member whose ready and capable of helping you out.
You’ll still legally own the property, but the guarantor provides the financial backing needed to reduce the risk for the lender and secure the deal. The guarantor bears responsibility for repaying the mortgage if you can’t pay it yourself.
If you are in the market for finance to fund a self-build project or to bridge the gap between the development and sale of a new construction, then it’s not a 100% mortgage you are looking for.
Instead, you will be looking at bridging finance, also referred to as construction finance.
A trusted friend or family member offers their savings or property as security for a 100% mortgage in deposit mortgages. Where savings are used security, your friend or family member deposits cash in a special savings account, and the money is held as security against the 100% mortgage.
Such deposits usually range between 10% and 20% of the property’s value. The guarantor earns interest on their savings during the loan period, but the rate is usually not as competitive as what is found in a regular savings account.
The cash deposited is usually held until:
Instead of a savings deposit, your guarantor can provide their property as collateral or security for a 100% mortgage. It involves having a charge over their home, usually between 20% and 25% of the value of the property you’re buying, as security against the mortgage.
Family offset mortgages work in a similar way to deposit mortgages. However, unlike deposit mortgages, your guarantor will not earn any interest on the savings used as security for the 100% mortgage.
The advantage is that you’ll get reduced monthly repayments for the 100% mortgage. The interest you’ll pay is based on the difference between the mortgage’s total value and the amount of savings held in the account, meaning you pay less interest than if the savings weren’t there.
Lenders like the Post Office offer family link mortgages, and they’re similar to 100% mortgages because you’re not required to put down any deposit. Such deals work by combining a 90% mortgage with a 10% loan usually raised in the form of a mortgage against your guarantor’s home. The family member who acts as the guarantor must be mortgage-free to qualify.
You may find other lenders offering similar products under different names. To get the best deal and expert advice on the entire market, it’s wise to consult a whole-of-market mortgage adviser or broker with access to all the available deals.
When considering a 100% mortgage, you need to think about the risk of falling into negative equity. The value of your property is likely to change with economic changes over time.
The biggest risk of a 100% mortgage is finding yourself in negative equity where you owe the lender more than what the property is currently worth. For example, if you use a 100% mortgage to purchase a property worth £150,000 but the property value drops to £100,000, you’ll still owe the lender £150,000 minus anything you’ve already paid off.
Such drops in value can create problems if you wish to move or remortgage. You may find yourself trapped in the original mortgage deal involving high rates unless you can find more money to cover the shortfall.
The risk of negative equity becomes less of a concern as you pay off more of your mortgage and own more equity in the property. However, the risk is significant in the first few years of a 100% mortgage.
You can be eligible for a 100% mortgage whether you’re a first-time buyer, a home mover, or a homeowner, but the number of deals available has become very limited.
Therefore, even with a friend or family member who can act as your guarantor, there’s no guarantee that you’ll get a 100% mortgage. Most mortgage lenders will scrutinise your finances and other requirements to determine if you can genuinely afford to repay each month.
Your chances of approval for a 100% mortgage are diminished if you have a bad or poor credit score or if you’re already committed to paying back other debts.
Although 100% mortgages are less common, you can still find them, especially with the help of a mortgage broker or adviser. They often come with the catch of requiring a guarantor who can afford repayments if you fail to keep up. Keep in mind the risks involved, including falling into negative equity and the guarantor losing their savings or home if the loan defaults.