What is a 100% mortgage?
A 100% mortgage is a loan equivalent to the full value of the property. This type of mortgage does not require an initial deposit or down payment to be eligible for it. To provide a clear example of this type of mortgage; for a property priced at £125,000, the borrower would receive £125,000 from the lender.
Which home buyers are eligible?
Mortgage lenders normally assess the eligibility of a homebuyer for this kind of mortgage by considering two essential criteria, both the ability, as well as the willingness of the applicant to repay the loan.
Ability is evaluated by the analysis of a potential borrower’s monthly income, debt, and assets. Willingness to repay is assessed by looking at the candidate’s credit report and how he or she has handled previous loans, as well as on-going periodic expenses, such as monthly rents or repayments of previous mortgages.
Pros and cons of the loan
100% mortgages are an ideal solution for people on a tight budget or for first-time buyers who do not have money saved up for an initial deposit. However, one downside of such a loan is that the interest rates are usually higher than what a lower valued loan would require for the same property. In addition, the lenders usually ask for securities or a deposit, such as bonds or stocks, owned by the borrower, as backup collateral. In the worst case scenario, there is the possibility of liquidation of these assets, that is, a sale at a price much lower than their market values, when the borrower fails to fulfill the repayment conditions set by the bank for the loan.
Present day – Can you still get one?
During the times of the most recent property boom, 100% mortgages were very common and easily available as mortgages for first time buyers or buy to let mortgages. However, the property market has been on the decline from 2007-2010 (2011) and hence, because of the increased risk of loss for both parties, such deals have practically disappeared from the scene. Banks or lenders are not keen on offering 100% mortgages especially to first-time buyers anymore. Some still offer them to their existing customers, and on occasion, a bank (e.g. Northern Rock) will consider a new client. Individuals with bad credit should not apply.
In these times of recession, 100% mortgages are not recommended to home buyers who are not certain about whether they will be able to commit fully to making the monthly payments. That is because there is a high risk of the value of the property plummeting and the borrower plunging into the state of “negative equity”. This is where the mortgage debt is higher than what the property is actually worth, and this creates obvious problems in case the house has to be sold off.
Alternative mortgages
While seeking for an alternative to a 100% mortgage, the ideal approach is to save up some money that would pay for an initial deposit for a lower LTV (loan to value) mortgage. 95% of LTV mortgages are the nearest available alternative to the 100 percent ones; for these a borrower needs to save up 5% of the value of the property being mortgaged.
The more the borrower saves up for an initial deposit, the better. Why? This is because the lower the loan-to-value mortgage a person receives, the lower are the monthly payments required for it, as compared to a higher LTV mortgage for the same property.
Also, for borrowers who can make a higher percentage deposit, there are many more options available and there is a chance of getting better deals as many more lenders and banks will be offering a lower LTV mortgage.
If saving up for a deposit is not possible, another alternative to consider is “a guarantor mortgage.” Such a loan offers the option of lending large amounts in return for a security deposit, usually of their savings, by one of the parents of the borrower.
Still another alternative is “shared ownership”. This option involves sharing the property being mortgaged, with another person, usually a representative of a housing association or the government, termed as the “sharing owner.” The person interested in the property mortgages it in incremental steps, for example, 25% of the value of the property while the rest is owned by the sharing owner. Then, when the first part is paid off, another 25% can be mortgaged on the terms agreed upon with the sharing owner, earlier. This continues until the borrower has acquired the entire property.