A simples guide

Should I get a 100% mortgage?

You may have seen recent press coverage suggesting that 100% mortgages are available when it comes to buying your home.

If you’re struggling to raise a deposit to get yourself on the property ladder or to move on to a new property, you’d be understandably excited by this news.

We’d like to put what’s really going on in context for you and point out some of the things to consider when it comes to 100% mortgages.

Just a glance back to the bad old days

Before the banking crisis in 2008, 100% mortgages had been widely available from a number of lenders, not least from Northern Rock and Bradford and Bingley that now, no longer exist.

While no one would say that 100% mortgages directly contributed to the crisis per se, they were widely seen as symbolic of a lending climate that was too relaxed, with too little attention paid to what borrowers could really afford.

The very nature of 100% mortgages can leave borrowers at risk of ‘negative equity’, a situation where their property is worth less than they have borrowed. If you have borrowed 100% of the property value, even a modest fall in house prices could leave you in this position.

What changed?

Following events in 2008, banks and lenders tightened up lending criteria. This wasn’t necessarily all their own doing, the Regulators introduced new ‘affordability rules’ when it came to mortgages, forcing lenders to assess the affordability of the mortgages rather than simply relying on how much the borrower earned as they’d done previously.

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But the newspapers said they’re back

It is true that with certain types of mortgage you can borrow 100% of the property value.

However, there are some significant conditions attached and they’re conditions that affect your loved ones as well as yourself.

100% mortgages available today are what are known as Guarantor Mortgages or Family Deposit Mortgages.

With Guarantor mortgages, a family member must agree 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.

With Family Deposit Mortgages your family member must deposit cash, usually between 10% and 20% of the property's value in a special savings account.

This money is held for a fixed period of time as security against your mortgage. When you’ve met the repayments and any other conditions for a period of time, the money is returned and if you can’t, this money is used to meet repayments.

In truth these products have existed for a while. They have come to the media’s attention recently because a mainstream lender announced a new family deposit mortgage at a lower fixed rate than other products of this type on the market.

So what should I do?

We believe that borrowing 100% is always a risky business. Putting the cash of your parents or other close family members at risk, for some people make it even more so.

That doesn’t mean you should completely discount them. You need to make your own, calculated personal decision. Look hard at your specific circumstances and make sure all parties concerned fully understand the consequences if things go wrong before entering into them.

Alternatively even a relatively small 5% deposit will open up other opportunities and the larger the deposit, the better the deal you will be able to access.

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