100% mortgages

If you’re struggling to raise a deposit to get yourself on the property ladder, this guide will tell you what you need to consider when it comes to 100% mortgages. 

If you’re struggling to raise a deposit to get yourself on the property ladder, this guide will tell you what you need to consider when it comes to 100% mortgages. 

Mark Gordon
From the Mortgages team
3
minute read
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Posted 15 MARCH 2021

What is a 100% mortgage?

Mortgages are typically expressed as a percentage of the price of the home you’re buying. So, in this context, a 100% mortgage means that you’re borrowing the entire value of the property, without needing to put down a deposit. 

How does a 100% mortgage work?

100% mortgages are far less common than they used to be, because you don’t need to pay a deposit. Instead, you’re borrowing the entire amount needed to buy the property. In terms of the repayments you make, these will still be monthly over an agreed term, but you’ll probably be charged a higher interest rate, as you’ll have no equity in the home.

However, most 100% mortgages are ‘guarantor mortgages’. A guarantor mortgage means that you’ll need to find a trusted family member or friend who will act as your guarantor. This is to provide security to your lender, as the guarantor will be held responsible for paying the mortgage if you can’t pay it yourself. Asking someone to be your guarantor is a big deal, as it puts a lot of responsibility on their shoulders. If you do need a guarantor, make sure you ask someone you trust, who has the means to support you if necessary, and make sure you make it crystal clear, so they understand what’s being asked of them. If they can’t then pay the mortgage for you, their home could be used as collateral, meaning it could be repossessed.

How have 100% mortgages changed?

Before the banking crisis in 2008, 100% mortgages had been widely available from a number of lenders.

Following events in 2008, lenders tightened up lending criteria and the mortgage market regulator, the Financial Conduct Authority, eventually introduced new affordability rules designed to ensure that borrowers could manage to make the necessary repayments.

This forced lenders to pay more attention to each customer’s whole financial situation, rather than simply relying on how much the borrower earned.

Can I get a 100% mortgage?

With today’s tighter lending criteria, these products are no longer widely available, although niche products are offered by several lenders. To be offered a 100% mortgage you’re likely to need a family member to be a guarantor for the loan, meaning they become liable for the debt if you default on the repayments.

  • Guarantor mortgages

With guarantor mortgages, a family member agrees to guarantee your mortgage repayments. If you can't meet your repayments and your home gets repossessed, your mortgage lender will expect your guarantor to cover the cost of any losses or even repossess the family member’s home to cover them. This is known as using a property as security.

  • Family deposit mortgages

With family deposit mortgages your relative must deposit cash, usually between 10% and 20% of the property’s value, in a designated savings account (which will pay them interest in the normal way).

The guarantor won’t be able to withdraw any of their money until the end of a stated period – say, five years. This is known as using savings as a security.

If you meet the repayments and any other conditions for the stated period, the money is returned to your relative. If you default, however, this money is used to meet repayments.

What are the advantages of a 100% mortgage?

The main advantage of a 100% mortgage is that it lets you buy a home without having to save for a deposit.

What are the disadvantages of a 100% mortgage?

A 100% mortgage can leave a borrower at risk of slipping into ‘negative equity’ – a situation where their property is worth less than the amount they’ve borrowed against it. If you’ve borrowed 100% of the property’s value, even a modest fall in house prices would leave you in this position.

Taking on a 100% mortgage using a guarantor means you’re taking on conditions that affect your loved ones, as well as yourself. It certainly is a decision that requires serious consideration by all parties.

Are 100% mortgages available for first time buyers?

Like we said earlier, 100% mortgages are far less common than they used to be, but you can still find them. That’s still true for first-time buyers, but it usually comes with the catch of it being a guarantor mortgage. This means you’ll need a friend or family member who will act as your guarantor, offering to pay your mortgage if you can’t afford it.

Be careful about getting someone to be your guarantor. It’s a huge commitment for both them and you, so you both need to understand how it works. Your guarantor needs to have enough money available to be able to cover the cost of your mortgage if you’re unable to keep up, because, if they don’t, they could lose their house as well, as it’ll usually be secured as collateral against the mortgage.

What does it mean if the LTV is over 100%?

The LTV of your mortgage means the “loan to value” ratio. This is how much you’ve borrowed against the value of the home. If this is more than 100%, it means you owe more than the property’s worth. This could be because house prices have fallen, or you’ve asked to borrow more than the value of the home, because you’re looking to invest the rest into renovations.

Either way, having an LTV over 100% means you’re in “negative equity”. This means if you sell the property, you won’t have enough to pay off your outstanding balance, which means you’ll be breaking the terms of your mortgage. This could lead to extra charges and penalties.

Because of that, you could consider making home improvements to increase the value of the home and bring the LTV back under 100%. But that depends on you having the money to make the improvements needed. If you can’t afford to do that, you may just have to be patient and hope that the market naturally picks up and your home’s value improves organically, while continuing to pay it off each month.

What are the benefits of putting down a deposit?

Even a relatively small 5% deposit will give you the opportunity to choose from more mortgage products; and the larger the deposit, the better the deal you’ll be able to access. It can be difficult to save for a deposit, but in doing so it can certainly widen your options and reduce your financial risks.

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