If you’re looking to buy your first home, the idea of a 100% mortgage could be appealing. After all, who wouldn’t want to get their foot on the property ladder without having to save tens of thousands of pounds for a deposit?
However, as with any financial decision, there are pros and cons to consider before deciding if this option is the right choice for you.
Let’s take a closer look.
Understanding 100% mortgages
What is a 100% mortgage?
Also known as no deposit mortgages, this is a type of home loan where the lender finances the entire cost of the property. This means that the borrower doesn’t need to provide a deposit, which is typically a minimum of 5% of the home’s purchase price.
While this may seem like an attractive option for those who don’t have a deposit, it’s important to understand the potential risks and drawbacks. For example, since the borrower hasn’t put any money down, they may have to make higher monthly repayments and may be more likely to owe more on the home than it’s worth, especially if house prices drop.
100% mortgages were available before the 2008 financial crash but disappeared after that as tighter lending rules came in. In May 2023, Skipton Building Society launched a 100% loan to value mortgage called the Track Record Mortgage which first time buyers may be eligible for if they meet certain conditions, including proof of having paid at least 12 months of on time rental payments consecutively in the last 18 months. Applicants must meet affordability criteria and credit checks. This mortgage has a maximum loan size of £600,000 and the maximum loan to income ratio is 4.49. It is currently available to buyers over 21 at a five-year fixed rate of 5.49% with a maximum mortgage term of 35 years. The Skipton Building Society has capped the maximum monthly repayment at the average rental cost that the applicant has paid over the last six months rental cycle to ensure they can afford it.
How 100% mortgages work
As the lender assumes all the risk of the loan since they are providing the entire amount to purchase the home, 100% mortgages often come with higher interest rates and stricter eligibility criteria than traditional mortgages. This is to ensure the lender is protected in case the borrower defaults on the loan.
It’s also important to note that not all building societies and mortgage providers offer 100% mortgages, and those that do may have specific requirements for borrowers. For example, a good credit history will be required, along with certain criteria such as debt-to-income ratio. Ultimately, whether a 100% loan to value mortgage is the right choice for a borrower depends on their individual situation and goals. It’s important to carefully consider other options and speak with a trusted financial advisor before deciding.
Pros of 100% mortgages
No house deposit is required
One of the biggest advantages is that no cash lump sum deposit is required. This can be incredibly beneficial for those who don’t have the funds or time to save money for a deposit. Not having to come up with money upfront can make getting on the housing ladder possible for those who might not have otherwise been able to afford it.
For many people, the hard work of saving for a deposit can take years, and even then, they may not have enough to buy a home in their desired location or with the features they want. A 100% mortgage eliminates this barrier, allowing individuals and families to achieve their dream of homeownership without having to wait years to save for a deposit.
To have the best chance of being accepted for a no deposit mortgage you need a good credit score, a low level of debt, and a regular income. You will need to prove that you can afford the monthly repayments required.
Increased homeownership opportunities
By eliminating the need for a deposit, a 100% mortgage can increase the number of people who are able to buy a home, particularly first-time buyers. This can help to stimulate the housing market and boost the overall economy.
When more people are able to buy homes, it creates a ripple effect in the economy. Homeowners are more likely to invest in their properties, which can lead to increased property prices and more money flowing into the local economy. Additionally, when more people can buy homes, it can lead to increased demand for goods and services, further boosting the economy.
Potential for faster equity growth
Since 100% loan to value mortgages allow buyers to own a home without a deposit, they can start building equity right away. As the home’s value grows, the owner’s equity also grows, potentially making it easier to access future loans or sell the property at a profit.
Equity is an important part of homeownership, as it represents the value of the home that the owner actually owns. With a 100% mortgage, homeowners can start building equity immediately, rather than waiting several years to build up a significant amount of equity. This can provide greater financial security and flexibility in the long run.
Flexibility in financial planning
With a 100% mortgage, borrowers have the flexibility to put money towards other important financial goals, such as retirement contributions, paying off debt, starting a business or emergency funds. When individuals and families are able to achieve homeownership without having to save for a deposit, they have greater flexibility in their overall financial planning which can lead to greater financial stability and freedom in the long run.
Cons of 100% mortgages
While zero deposit mortgages can be an attractive option for those looking to buy a home with no deposit, there are several drawbacks to consider before taking out this type of loan.
Higher interest rates
One of the main drawbacks of zero deposit mortgages is that they often come with higher interest rates than traditional mortgages. This is because these loans carry greater risk for the mortgage lender, as the borrower has no equity stake in the property. Over the life of the loan, this can mean that the borrower ends up paying more in interest than they would with a traditional mortgage.
It’s important to carefully consider the long-term financial implications of taking out a no deposit mortgage, and to compare the interest rates and mortgage deals from different lenders before making a decision.
Increased risk of negative equity
Another potential downside is the increased risk of negative equity. When a home is purchased with a 100% mortgage, the buyer has no equity in the property. This means that if the property’s value decreases, the borrower can quickly go into negative equity, where they owe more on the home than it’s worth.
This can put a homeowner in a precarious position if they need to sell their home unexpectedly, effectively making them unable to move.
It’s important to understand negative equity and carefully consider the housing market and the potential for property values to fluctuate before taking out a no deposit mortgage.
Stricter lending rules
Because 100% mortgages are riskier for lenders, they often come with stricter lending requirements. This can make it harder for some first time buyers to qualify for a 100% mortgage, particularly those with lower credit scores or smaller incomes.
If you’re considering a 100% mortgage, it’s important to carefully review the lender’s eligibility criteria and to work on improving your credit score and financial standing if necessary.
Limited mortgage options
Not all mortgage providers offer no deposit mortgages, which can limit a borrower’s options when it comes to selecting a lender. This can make it more difficult to find a good deal on a 100% mortgage, as there are fewer lenders to choose from.
It’s important to shop around and compare the mortgage deals and competitive rates of different lenders before deciding on a 100% mortgage.
Ultimately, taking out a zero deposit mortgage is a big financial decision that requires careful consideration and research. By weighing the pros and cons and working with a mortgage broker and a reputable lender, you can make an informed decision that’s right for you and your goals.
As 100% mortgages present a higher risk to the lender, rates and application fees can be higher.
Alternatives to 100% mortgages
There are several other options that can help you achieve your goal of homeownership. Here are some routes to consider:
Shared Ownership Schemes
These can be a good alternative for those who can’t afford a full down payment or qualify for a standard deposit mortgage. You buy a percentage of the house (between 25-75%) and the rest is owned by the local authority or housing developer. You pay rent on the proportion of the house that you don’t own. It can mean you have a smaller mortgage and a smaller deposit. Shared ownership schemes can be a great way to get a foot on the property ladder, but it’s important to carefully review the terms and conditions of the agreement. Make sure you understand the costs involved, such as rent, maintenance fees, and additional expenses. You’ll also need to consider how to sell your share if you decide to move in the future.
These require a close family member or friend who owns their own home to be named on the mortgage too: they must agree to meet any mortgage repayments you miss and either use their own home as security or their savings.
Government Mortgage Guarantee Scheme
The government guarantees 95% mortgages for buyers with 5% deposits on houses worth up to £600,000. The scheme was launched in 2021 and has been extended to the end of 2023.
New build developer loans
Here, a developer offers to loan you the deposit on a home they have built.
First time buyer mortgage
You are usually required to come up with a deposit of 5% or more.
Right to buy mortgage
If you have lived in council housing for three years you may be able to buy the house at a discounted price.
With a higher joint income, you could borrow more, raising the maximum amount you can buy a home for.
While 100% mortgages can be an appealing option for those looking to buy a home without a deposit in the current UK market, they come with their fair share of pros and cons. It’s important for buyers to carefully consider their financial situation and their long-term goals before deciding if this is the right choice for them.
Overall, there are several alternatives to no deposit mortgages that can help you get onto the property ladder. It’s important to do your research and carefully consider your options before making a decision.