Mortgages that don’t require a deposit might make a return in 2022 – but does a 100% home loan put first-time buyers in danger?
The Building Societies Association (BSA) recently asserted lenders should consider returning the controversial loans, which disappeared following the financial crash in 2008, to prevent first-time buyers relying exclusively around the Bank of Mum and Dad.
Critics, however, believe coming back to 100% mortgages would be incredibly risky, especially in the current financial climate.
Here, we explain how 100% mortgages could work and provide advice on the options for buyers without any deposit.
What is really a 100% mortgage?
A 100% mortgage is a loan for the whole cost of a property.
Rather than saving a first deposit, the buyer has only to pay stamp duty, mortgage and attorney's fees, and the cost of a home survey.
While this may sound appealing, mortgages at 100% (or perhaps excess of 100%) loan-to-value (LTV) played a part within the housing industry crash during the economic crisis about ten years ago.
Where deposit-free mortgages are available today, all of them require a family member to do something like a guarantor or provide financial security.
Could 2022 function as the year from the 100% mortgage?
With high house prices and low wage growth keeping property unrealistic for a lot of prospective first-time buyers, lenders must consider methods to improve affordability.
That’s according to the BSA, which claimed in November that lenders should ‘push harder in the direction of 100% LTV products‘, by considering deposit-free deals for borrowers who fit certain criteria, such as employed in specific professions or prone to get a large inheritance.
100% mortgages have support in the wider public, too. A recent YouGov poll found that nearly half (48%) of 9,713 respondents said they believe 100% mortgages would be a good idea. At the same time, 32% of respondents were against the idea and 20% were unsure.
100% mortgages and economic uncertainty
There’s without doubt that 100% mortgages are risky for buyers. If house prices drop before you’ve paid down a substantial portion of the loan, you could be left in negative equity, facing a huge bill to sell and not able to remortgage.
That fear is keenly gone through by critics who cite the economic crisis of 2008.
Back then, most financiers offered mortgages of 100% LTV and above, with a few even offering 125% deals. The crash led to many households being stuck in negative equity or defaulting on their own loans.
With house prices now stagnating and confusion reigning within the UK’s withdrawal in the Eu, these concerns are rearing their heads again.
And within this duration of economic uncertainty, some wonder if 100% deals could be offered at competitive rates.
Don’t we already have 100% mortgages?
You may have seen mortgages advertised at 100% LTV, but these aren’t comparable to these products offered before the financial crisis.
Indeed, all of the ‘100%’ mortgages currently available on the market require a parent or member of the family to do something like a guarantor, be named on the mortgage agreement or use their savings or property as security.
While the specifics of these deals vary significantly between various lenders, they broadly fit into the categories below.
|Type of mortgage
|How it works
|Traditional guarantor mortgage
|A family member acts as a guarantor on the buyer’s mortgage debt.
|In the worst-case scenario, the guarantor could lose their home.
|Aldermore allows buyers to borrow 100% of the property’s value, having a parent or grandparent guaranteeing the amount above 75% LTV.
|Family deposit mortgage
|A member of the family deposits 10-20% from the property value right into a special account, to do something as security against the mortgage. These deposits earn interest. An alternative is family offset mortgages, where the buyer pays interest on the difference between their loan and also the balance. These deposits don’t earn interest.
|The member of the family could lose savings if the buyer defaults.
|The Barclays Family Springboard Mortgage involves a relative providing 10% of the purchase price as security. If the buyer makes their payments as agreed, the family member gets their cash back within three years.
|Family link mortgage
|The buyer get a 90% mortgage on the home they’re buying, along with a 10% mortgage is taken out on the family member’s home.
|A loan is secured on family member’s home, so this could be at risk when the buyer defaults.
|The Post Office offers these mortgages. They involve the buyer paying two separate repayments within the first 5 years – an interest-free payment on the family member’s 10% mortgage along with a repayment on their 90% mortgage.
We recommend taking independent legal advice before financially linking yourself with someone else.
Joint borrower, sole proprietor mortgages
Some lenders will also be offering so-called ‘joint borrower, sole proprietor’ (JBSP) mortgages, which permit parents to become listed on their child’s mortgage.
The big benefit for parents is the fact that their child will get a rate plan and, because the parent isn’t named on the deed, they avoid the 3% stamp duty surcharge for those who buy a second home.
Older parents may find it difficult to get accepted with this type of mortgage, and even though the number of products available is rising, there’s still not really a huge amount of competition.
To find out more about JBSP mortgages, check out our article from captured.
Can’t we change affordability criteria instead?
In theory, one option to 100% mortgages is for lenders to loosen the factors that first-time buyers must meet to be eligible for a a mortgage.
Currently, the Bank of England sets limits how many mortgages lenders can grant at 4.5 times annual salary or over.
While this helps to keep a lid on risky lending, this means that for many buyers on limited incomes, even the cheapest home in their area remains unobtainable.
Some lenders, such as Darlington Building Society and Hinckley & Rugby Building Society, have begun offering loans at 6 and 5.Five times annual income respectively, albeit only to buyers in a few professions.
The chart below shows the way the percentage of mortgages granted at 4.5 times income or more has grown during the last decade.
What’s wrong with 95% mortgages?
While 100% mortgages theoretically allow buyers with no deposit to get on to the property ladder, there are several bargains available right now for clients who can help to save a 5% deposit.
Indeed, 95% mortgages have hit record low levels, averaging just 3.33% for any two-year fixed-rate deal or 3.89% for a five-year fix.
Your home may be repossessed if you don't continue repayments on your mortgage.