100% mortgage: is it the right option for you?

Many people share the dream of owning a home, but the high cost of deposits can make it feel out of reach. That's why a lot of people were excited when it was announced that a 100% mortgage scheme was being reintroduced this week, and it certainly caught our attention too!  

We’ve delved into the details of this new scheme to give you all the information you need before deciding if it’s the right option for you.  

So, what exactly is a 100% mortgage?  

Also known as a zero-deposit mortgage, it is a home loan that covers the entire purchase price of a property, allowing buyers to secure a mortgage without having to put down a deposit. Essentially, this enables borrowers to finance their entire home cost through the mortgage, eliminating the need for upfront savings. 

You might be curious as to why you haven't come across this scheme before (or if you remember the days of analog, why it's been off the radar for a while). The truth is 100% mortgages were quite popular in the UK before the 2008 financial crisis. They were offered by lenders to assist first-time buyers in getting onto the property ladder without the burden of saving for a deposit. However, the aftermath of the financial crisis led lenders to become more cautious about risks, which ultimately caused 100% mortgages to become less prevalent.  

As you may have seen in the news, Skipton Building Society have recently announced they are reintroducing this product back to the market. Skipton offers the 100% mortgage through its Track Record mortgage product, featuring a five-year fixed-rate mortgage specifically designed for first-time buyers.  

It is important to note that your monthly mortgage payment must be equal to or lower than the average of the last 6 months rental cost – e.g. if the average rent over the last 6 months is £800 pcm, the mortgage payment must be £800 or lower per month. This will have a direct effect on the amount of capital you are eligible to borrow for the property purchase.  

 

Will I be eligible?  

The eligibility requirements will differ depending on the provider - but in general, you must: 

• Be a first-time buyer 

• Be aged 21 or over 

• Have been renting for 12 consecutive months out of the past 18, with proof of payment for both rent and utility bills 

• Not have missed any repayment commitments for the last 6 months  

• Not looking to buy a new-build flat 

• Have a stable income 

• Have a good credit history 

 

Having grasped the fundamentals of 100% mortgages, let's now delve into the advantages and disadvantages that come with this scheme.  

Pros of 100% Mortgages: 

• Easier access to homeownership: 100% mortgages allow buyers to enter the property market without the need for a deposit, making homeownership more accessible for those who struggle to save due to rising rental cost. 

• Immediate property ownership: Buyers can become homeowners without the delay of saving for a deposit, enabling them to enjoy the benefits of homeownership sooner. 

• Independent arrangement: Unlike with a guarantor mortgage, your family is left out of the financial arrangement. This could help avoid damaging relationships in case of financial difficulties and loan default. It also ensures their money is not put at risk and their ability to borrow is not compromised. 

• Equity building: you may be able to build up equity in your home and either sell or remortgage for a better deal.  

 

Cons of 100% Mortgages: 

• Higher interest rates: 100% mortgages often come with higher interest rates compared to mortgages with a deposit. This can result in higher monthly mortgage repayments and overall increased borrowing costs. 

• Risk of negative equity: If property prices fall, there is a greater risk of your mortgage being worth more than the total value of your home, known as negative equity. In such a scenario, it becomes challenging to remortgage to a different lender or find competitive mortgage rates. 

• Limited lender options: The availability of 100% mortgages is limited, and not all lenders offer them. This means borrowers may have fewer options when choosing a lender and mortgage product. 

• Stricter lending criteria: Lenders take on higher risk with 100% mortgages, as they have no security if the borrower defaults on the loan. Consequently, lenders may have stricter lending criteria, making it harder for some borrowers to qualify.

 

Don’t be put off if the 100% mortgage scheme isn’t for you, there are still options out there that can help you achieve your dream of property ownership: 

• Shared Ownership: Shared ownership schemes enable buyers to purchase a percentage share of a property and pay rent on the remaining share. This option requires a smaller deposit and reduces the size of the mortgage required. 

• Family Assisted Mortgages: Family Assisted Mortgages involve a family member providing a deposit or using their property as collateral to assist the buyer. This support can help buyers secure a mortgage with more favorable terms or a lower loan-to-value ratio. 

• Rent-to-Buy: The Rent-to-Buy scheme combines renting and buying, offering individuals the opportunity to rent a property at 20% below the market value during a specified rental period, with a portion of the rent potentially going towards building up savings for a future deposit.  

For those aiming to get onto the property ladder without a deposit, a 100% mortgage can appear enticing. However, it is crucial for prospective buyers to weigh the potential drawbacks associated with these schemes, such as higher interest rates and stricter lending criteria.  

At Ascend, we are committed to providing a comprehensive service, which includes our in-house mortgage advisor, ensuring you receive expert guidance throughout the process.  

Get in touch to see how we can help!