The Death Of The 100% Mortgage

In February, thirteen different mortgage lenders offered 100% home loans. Today, these loans have died out. This will have a nasty effect on house prices.

Before buying a house, it makes sense to save up a deposit. Of course, the larger the deposit the better, but you have to draw the line somewhere. By saving hard to buy a home, you get into the important habit of budgeting properly. In addition, your deposit gives you access to a wider range of mortgages.

However, in recent years, house prices have shot up so fast that savers have been unable to keep pace. Hence, during the housing boom, it paid to `get on the ladder' as soon as you could. Then again, now that house prices are falling steeply, taking your time and saving hard make perfect sense.

Conversely, what can you do if you don't have any savings to help buy a property? One answer is to borrow the entire purchase price, via a 100% percent mortgage. Between 1995 and 2007, house prices rose for twelve years in a row. Given this seemingly unstoppable trend, mortgage lenders rushed to give homebuyers ever-larger loans. Thus, as well as 100% mortgages, the housing boom saw the introduction of 105%, 125% and even 130% mortgages.

The most infamous of these mad mortgages was Northern Rock's Together mortgage, which I criticised repeatedly, beginning in March 2005 with Home Loans That End In Tears. Although the credit crunch virtually blew up Northern Rock last September, it continued to offer this crazy 125% mortgage until February, when it was nationalised by the government. When the last lender shut the door on 100%+ mortgages, I celebrated their departure in No More Mad Mortgages.

However, the bad news for first-time buyers is that, thanks to continued house-price falls, the market for 100% mortgages has also dried up. Take a look at the following table, which shows when each 100% lender ducked out:

First out of the blocks was Bank of Scotland, which made a sharp exit after Valentine's Day. Later that month, RBS and NatWest (both part of RBS Group) pulled their 100% loans. In March, seven of the remaining ten lenders withdrew their 100% mortgage deals.  In the first week of April, Abbey bowed out.

However, the real stragglers were sister companies Bristol & West Mortgages and Bank of Ireland Mortgages, which hung on until late June before leaving this market. Frankly, I am amazed that lenders continued to offer 100% mortgages after the carnage in March. The writing was already on the wall for house prices, so why take the risk of lending to borrowers who don't have a large deposit or hefty housing equity?

Anyway, the long and short of it is that it is now impossible to get on to the housing ladder without a decent deposit. Indeed, although 5% to 10% of the purchase price will get your foot in the door, the best deals are reserved for borrowers with deposits of 25%+. Hence, although house prices are falling, first-time buyers have effectively been shut out of the market for cheap mortgages.

Finally, according to recent research in the US*, the supply and availability of 100% mortgages has a significant impact on the future direction of house prices. Thus, with no 100% mortgages in the UK, things look increasingly grim for those on (or reaching for) the lower rungs of the housing ladder...

(* When I find a link to this research, I will post it here.)

Many thanks to Darren Cook and Michelle Slade at Moneyfacts for providing the above data.

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