We have all seen the ups and downs of the housing market and the various mortgage products that come and go, but one product that has been gaining attention lately is the 100% mortgage.
Today has seen the release of the new 100% Loan-to-Value “Track Record” mortgage from Skipton Building Society which will allow borrowers to finance the full purchase price of a property without needing to put down a deposit.
The Skipton product is slightly different as it is linked to the rent currently being paid and the mortgage payment cannot be more than the average of the borrower’s last 6 months rent. It will also need to meet Skipton’s standard income multiples.
This will help as there are many potential buyers who have proved they can afford to pay rent at the current high levels, but just do not have the means to meet ever-increasing deposit levels and feel constantly at the mercy of rising rents.
Whilst I have had some concerns in the past, the time now seems right for a new type of 100% mortgage, one that is underwritten prudently and where affordability is carefully taken into account.
Whilst this new product will not be suitable for everyone, it will help some of the new generation of home buyers get off the rental treadmill and enjoy the security of owning their own home.
We need to also change our thinking that property is a short-term investment, and realise it is a long-term home for us to build our memories in.
While this type of mortgage can be tempting, it’s important to understand the potential risks and drawbacks before jumping in. Here’s what you need to know about 100% mortgages:
A 100% mortgage, also known as a no-deposit mortgage, is a loan that covers the entire cost of a property purchase without requiring the borrower to put down any money upfront.
Whilst this means that the borrower does not need to have any savings or equity to be eligible for the mortgage from a deposit point of view, it is prudent that potential borrowers do have funds to meet any general mortgage costs such as Stamp Duty (if relevant), valuation, legal and moving fees. You should also consider what funds you will need to furnish the property.
We would also recommend that a “rainy-day” fund equivalent to three months’ monthly mortgage payments is put aside.
With a typical mortgage, the borrower would be required to put down a deposit of anywhere from 5% to 20% of the property’s value. This acts as a form of security for the lender, as it reduces the amount of risk they take on by lending money to the borrower. The more deposit you can put down, generally the cheaper the mortgage rate you can obtain.
With a 100% mortgage, the borrower does not provide any upfront deposit, and instead, the lender finances the entire purchase price of the property. The borrower is then responsible for repaying the full amount of the loan over the term of the mortgage.
For many first-time buyers, saving up for a deposit can be a significant barrier to homeownership, especially when rental costs are rising and we are in the midst of a fundamental increase in the costs of living.
A 100% mortgage can make it possible for these buyers to purchase a property without having to save up for a deposit first.
While a 100% mortgage can make homeownership more accessible for some buyers, it does come with risks that should be carefully considered.
Firstly, if the value of the property decreases, the borrower may end up in negative equity, which means that the outstanding mortgage balance is greater than the value of the property. This can make it difficult for the borrower to sell the property or refinance the mortgage in the future.
You may therefore need to stay in the property longer than you envisaged and will have to stick with your existing lender rather than shop around for a better rate.
Additionally, a 100% mortgage is riskier for the lender than a mortgage with a deposit. This means that the interest rates on 100% mortgages will be higher than on other types of mortgages, which will make the repayments more expensive for the borrower.
100% mortgages are less common than they used to be as following the financial crisis in 2008, many lenders became more cautious and tightened their lending criteria. Whilst many borrowers have benefitted by taking out a 100% mortgage in the past, some borrowers were effectively stuck as mortgage prisoners as the values of their property fell and did not come back to the high levels of their purchase price.
If you’re considering a 100% mortgage, it’s important to carefully weigh up the potential risks and benefits. While this type of mortgage can make it easier to get onto the property ladder, it’s essential to ensure that you can comfortably afford the repayments not just now, but also into the future, and that you have a plan in place for dealing with any potential drops in property values.
Ultimately, the decision to take out a 100% mortgage will depend on your individual circumstances and financial goals. As always, it’s a good idea to seek advice from a professionally qualified mortgage broker who can help you navigate the various mortgage products and find the one that’s right for you.
|GB Average monthly rent in Q4 2021||GB Average monthly rent in Q4
|Year on Year price change to monthly rent||100% Track Record Monthly Payment||Max Property value with 100% LTV based on monthly rent|
Average Rents Data source: Hamptons (part of the Skipton Group) & ONS House Price Index.
Example based on the average Great British rent amount of £1,290 (applicant borrowing at 100% loan to value with an interest rate of 5.49% over a 35-year mortgage term) Skipton may lend them based on this monthly rent they’re used to paying up to £240,509 (but this is subject to criteria, credit score, affordability, and rental track record).
For further details on the product and the full eligibility criteria please contact us here