A 100% mortgage is a loan on a property is a where the buyer does not need to put down a deposit at all. A pure 100% mortgage product has not been available since before the financial crisis but there are lenders who will offer something that they consider is a 100% mortgage. This may be manageable for many first time buyers wishing to get on the property ladder.
Historically, mortgage lenders prefer it when a first time buyer puts down a deposit. This is because it shows that the borrower has worked hard to get a deposit together. It also demonstrates that the borrower has saved for all of the fees associated with buying a property such as valuation fees, legal fees and if applicable stamp duty. The significance of this to the lender is that if the borrower gets into financial difficulties the borrower is less likely to walk away if they have had to work hard to get into the property in the first place. Losing money themselves may make them work harder to stay in the property. If a borrower hands back the keys then the mortgage lender would probably make a loss, especially in the early years if it is a 100% mortgage. This is because the lower the deposit the lower the equity in the property at the start the higher the risk for the mortgage lender. Even with house prices rising at a steady level, it will take considerable time for the property to have a considerable amount of equity in it.
A new wave of 100% mortgages are available to first time buyers which can help. It is getting harder for first time buyers to save for a deposit. If you consider the average house price in the UK is nearly £220,000 then a deposit of £22,000 is needed if 10% is to be put down. This is why family are more inclined to help in the current financial climate.
How it works
Schemes differ from 100% mortgage lender to another……but I will outline the main types. Much is dependent on what is available on the market when you want to apply for the mortgage as some 100% mortgage lenders withdraw these products once bulk funds have allocated.
Equity Charge on family members home
This is where a 100% mortgage lender will offer the full amount of the loan you require but will insist that a collateral charge must be put on a family members home. This is usually 35% to 40% of the new property purchase price and the lender will expect all legal costs to be paid by the borrowers family for adding the second charge to the family members home. This gives the lender added security until sufficient equity has has up within the property due to house price increases.
If repayments are kept up to date then this can be a good way to get on the property ladder without having to save for a deposit. There has to be sufficient equity in the family members home for this to be accepted by the lender.
Family Deposit Mortgage
This is where the 100% mortgage lender will lend you 100% of the purchase price of the property as long as you can find somebody who will agree to put 10% of the property price into a savings account for a period of 3 years. A parent is an obvious choice followed by a friend or relative but it could be anyone.
As an example….if you want to buy a property for £150,000 then somebody must put £15,000 into a special type of savings account with the lender. After 3 years the person who helped you out gets the money back plus interest if the mortgage repayments are kept up to date. It is not a bad deal if you can get somebody to do this for you.
The borrower has full ownership right to the property and the person who puts the 10% into the savings account for 3 years is not a guarantor.
Family Offset Mortgage
This is very similar to the family deposit mortgage except that a parent will have to put 20% into a savings account. Instead of the parent getting interest the mortgage repayments for the borrower will be lower. The downside is that the parent may have to wait considerable time before they get their money back as there has to be sufficient equity in the property first.
There are other ways in which a parent can help a first time buyer such as a Guarantor mortgage where the parent or friend offers to act as a guarantor if the borrower does not meet lenders criteria. In most cases a deposit is still required but there are 100% mortgage schemes where the guarantor offers their own property as security.
There is also the option for a parent to gift the deposit which then widens the mortgage lenders available to lend on the property.
All these schemes vary considerably and some lenders have further requirements that the parent or borrower must be aware of as well as overall affordability. Some require the borrower to be no more than a certain distance from work whilst others insist on a parental help rather than a friend or family member. Standard lending criteria will apply and the mortgage must still be affordable.
If you are interested in getting on the property ladder for the first time and you have a family member willing to help then give is a call and we can help you decide on the most suitable scheme.