Is the 100% mortgage back?

Adapted from an article by Fran Iven for This Is Money24 April 2023 www.thisismoney.co.uk

We take a look at whether deals that offer a leg-up are really the answer for first-time buyers trying to get on the ladder.

• Zero deposit mortgages can help buyers struggling to raise a deposit.
• ·With house prices still volatile is there too much of a negative equity risk?

The 100 per cent mortgage commands equal parts fear and reverence among British homeowners.

These now-controversial home loans saw banks and building societies lend the entire value of a property - and sometimes even more - giving first-time buyers a crucial leg up.

However, 100 per cent mortgages also came to symbolise the easy credit that summed up the 2008 financial crash, and largely disappeared in the years since.

But now a group of lenders have launched home loans that are not exactly 100 per cent mortgages, but are not far off either.

Skipton Group chief executive Stuart Haire has said the product will 'enable people trapped in rental cycles - where they're prevented from being able to save for a house deposit – to access the property ladder and make a home'.

But are 100 per cent mortgages - also known as zero deposit mortgages- really a good idea for those trying to get on to the property ladder?

Are 100% mortgages a good idea?

'I think 100 per cent can be amazing for the right people,' says Peter Dockar, commercial director at Generation Home. 'It is really good for people who have good incomes and high affordability but haven't been able to accumulate a deposit.'

Dockar argues that the need for a 5 per cent deposit to get a mortgage from most lenders is arbitrary, as it is based on the logic that unless you have a deposit you 'don't have any skin in the game'.

But buying a house is tough even without a deposit, he says, and first-time buyers will be keen to build equity in their homes.

That is even more true if they are currently renting and can put that money towards their own property instead.

Furthermore, banks will run extensive affordability checks on any prospective borrowers meaning the lender will be confident in the buyer's ability to pay the mortgage. 

However, others worry that, with house prices remaining volatile, mortgages without a deposit put borrowers at risk of going into negative equity – where the value of the loan is more than the property.

Kylie-Ann Gatecliffe, director at brokerage firm KAG Financial, said: 'The negative equity fear will raise some eyebrows, and this would have to be a detailed conversation with any first-time buyers looking to pursue this as an option. In comparison to renting, though, is the risk that high, with rising rents chomping away at disposable incomes?'

She suggests getting on the ladder with a fixed monthly payment may still be safer than renting and that the biggest risk with negative equity is buying and then selling a property in quick succession.

'If the property is going to be a long-term home, market trends all point in the direction that they should see the value grow,' she added.

How do zero deposit mortgages work?

In the wake of the 2008-9 financial crisis lenders pulled their no deposit mortgages from the market, viewing them as too risky to lend on. Now days most 100 per cent mortgages available are based on a guarantor system, where a family member or friend who owns their own home is named on your mortgage. One example is Barclays' family springboard mortgage.

This home loan works by putting a friend or family member on the hook for any missed payments.

Currently there are 17 zero deposit products on the market, according to financial data firm Moneyfacts, accounting for just 0.3 per cent of the UK market.

Other options on the market include deposit booster home loans, such as the one offered by Generation Home, where the deposit provider acts as an interest-free lender.

Alternatively, the deposit provider is given an equity stake in the property in return for the loan.

Joint borrower sole proprietor products are also available says Gindy Mathoon, senior mortgage adviser at Create Finance.  This is where there is a named borrower alongside the buyer on the mortgage but not the title deeds. It means you can have two incomes on the mortgage without the second person becoming a legal owner.

'When the lender is assessing affordability in this case they will assess any outgoings the named borrower has currently and on completion of the mortgage - this includes current mortgages, household bills and secured/unsecured debts. This seems to have replaced the old 'guarantor' mortgage,' adds Mathoon.

It is not yet clear how Skipton's product will operate, but the news has been welcomed by brokers.

'The scheme is perfect for first-time buyers who can demonstrate a record of paying rent successfully and have a clear credit profile.

'Affordability will still have to be assessed but this will provide a much-needed boost for the property market,' says Bob Singh, Founder at broker Chess Mortgages.

What other options are there for first time buyers? 

However, a zero-deposit mortgage is not the only option for aspiring homeowners.

Shared ownership schemes allow you to buy a percentage share of a property, if you cannot afford the deposit or the mortgage payments on a house on the open market.

It does not mean, as the name may suggest, that you need to share your property with other individuals. Instead, you own a proportion of the home and pay rent on the rest.

When buying through shared ownership you still have to put down a deposit for the share that you own, but it is a deposit on only your share, so will be significantly less than on another property.

Although this article is sourced from a reliable source, this excerpt was written by a third party, we cannot confirm the accuracy of any figures nor the attribution of quotes.

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