If you take out a 100% mortgage, it means that you don’t put down a deposit for a property, but lend the full amount instead. These types of mortgage loans are rare however, since they are a high risk to lenders, especially after the credit crunch in 2008, which led to mortgage lenders demanding larger deposits and more stringent lending conditions.
Because 100% loans carry a high level of risk for lending companies, borrowers are normally charged higher interest rates. It is much better therefore, to raise as much as you can for a deposit, since the higher the down payment, the lower the interest rate will be that you have to pay for your mortgage loan.
Why is a 100% mortgage so risky?
They carry a high risk because there is always the possibility that house prices may fall. For example, if a borrower takes out a 100% mortgage of £200,000 on a home, and the property devalues in price, then the amount owing by the borrower becomes more than the actual value of the home. In addition to this, he will also owe the interest rate linked to the amount of the mortgage he has borrowed. This is known as negative equity, and has at various times, being a huge issue in the history of the UK housing market, especially during the early 1990s.
When you are in negative equity, it is harder to move home, borrow again, or get another mortgage to buy another home.
Lenders are reluctant to offer 100% loans because of the high risk it poses in recovering the full amount of money from the borrower by repossessing the property should the borrower get into arrears with his mortgage.
What options does a borrower have with a 100% mortgage?
Borrowers can get a 100% mortgage through a conventional guarantor mortgage, which involves a family member co-signing the amount of money required for the mortgage.
As guarantor, the family member will be held responsible for covering any losses should the property be repossessed if the borrower is ever unable to make the mortgage payments. If the family member is unable to cover these losses, then the lending company will repossess his/her home as well, although they will only be held legally responsible for the amount owing on the borrower’s mortgage.
Now, for the first time since the financial disaster in 2008, a major lending company, Barclays, has started offering 100% mortgages.
In May 2016, Barclays introduced its Springboard mortgage, which offers 100% loans, provided that a family member is willing to back it up. To secure the loan, the borrower must save 10% of the value of the property for 36 months. The mortgage rate will be set at 2.99% for three years, and the family member backing the mortgage, will earn interest on the basic rate as well, plus an additional 1.5%.
There are benefits to guarantor loans, provided that the borrower keeps up with the repayments. No deposit is required, and the family member acting as guarantor will not be held accountable if the borrower gets in arrears.
Further information is available at http://www.whathouse.com/mortgages/