First-time buyers: the return of 100% mortgages

With deposit-free mortgages making a comeback, what are the big downsides to consider before signing up for one?

It would appear that 100% mortgages are back.

Mortgages that allow people to purchase a property without putting down a deposit virtually disappeared after the financial crash, but seem to be making something of a comeback.

Skipton Building Society has announced plans to offer products at 100% loan-to-value (LTV) to help those trapped in the rental market to take that all-important first step into home ownership.

It would use the borrower’s rental payment history instead to help assess what the buyer could actually afford.

Stuart Haire, the chief executive of the mutual, argued that there are too many people “trapped in rental cycles”, who can clearly afford a mortgage but are being prevented from buying because they have not saved enough for a deposit and can’t get help with one from loved ones.

It’s worth pointing out that this product has not been launched yet, so exact details of how it would work are not yet known.

Buying without a deposit

It’s important to highlight here that there are already mortgages available that allow borrowers to get hold of a loan worth the full value of the property, though they will involve the help of a loved one.

Mansfield Building Society for example offers a Family Assist mortgage, where you can get a 100% LTV mortgage.

However, a loved one ‒ such as a parent or grandparent ‒ will need to put savings worth 20% of the purchase price in an account with the mutual. Alternatively, they can use some of the equity in their own home as collateral. 

There are other lenders, generally building societies, that offer something similar.

Building a deposit has long been an issue for aspiring buyers, but it is a situation that has got worse in recent years as house prices have rocketed.

The reality has been that no matter how diligent you are in putting aside some money each month, your deposit savings are being outpaced by the rate of house price growth.

However, there are some big concerns to bear in mind with a 100% mortgage. 

The risk of negative equity

A big consideration for any mortgage borrower right now with a small deposit is negative equity.

This is where the size of your mortgage ends up being higher than the value of your property.

So if you bought a property with a 5% deposit, and within a year house prices dropped 10%, then you would be in negative equity since your outstanding mortgage would be higher than what the property is worth.

Let’s be clear, this isn’t automatically going to be an immediate problem.

If you have no plans to move anytime soon, and you can afford your monthly mortgage repayments, then everything is (relatively) fine.

The trouble comes if you want to remortgage or sell the house and move on.

With remortgaging, lenders aren’t going to refinance your deal at above 100% LTV, so chances are you will be stuck on your lender’s standard variable rate (SVR), which is the rate you move onto after your initial fixed or variable rate comes to an end. 

The SVR is set independently by each lender and can be increased at any time, irrespective of what’s going on with Bank Base Rate.

And they tend to be significantly higher than the rates on new mortgages, meaning that when your initial deal comes to an end, you’ll have to stomach a sizeable hike in your monthly repayments. 

Similarly, negative equity can dash your hopes of being able to move.

While being ‘in the red’ doesn’t stop you from selling the property, the proceeds won’t be enough to clear the mortgage, meaning you’ll have to find the money separately in order to do so.

What’s more, you obviously won’t have any money left over from the sale to use as a deposit on a new property.

What’s happening with house prices?

This is less of a pressing concern when house prices are on the rise, as they have been in recent years. However, things have undoubtedly got a lot stickier in the wake of the farce of Liz Truss’s time as Prime Minister.

The rise in mortgage rates, combined with general uncertainty around economic prospects ‒ particularly at a time of high inflation ‒ has put plenty of would-be buyers off going ahead with a purchase.

And the subsequent drop in demand is having an impact on house prices.

According to the latest house price index from Nationwide Building Society, for example, house prices dropped 3.1% in the 12 months to March, the biggest annual drop since 2009. 

That downward slide looks likely to continue, making negative equity a far more pressing concern for anyone contemplating borrowing at a high LTV.

Is it worth the risk?

Ultimately, 100% mortgages are not inherently a bad idea.

For the right borrower, and the right property, they can make all the sense in the world ‒ whether a borrower is able to save a large deposit (or ask a loved one for the cash) doesn’t really have any great bearing on how well they will be able to keep up with their repayments over the long term.

Yet there are some sizeable downsides that need to be taken into account, by all parties, before opting for one.

Rather than offering a homebuying solution, it could instead create deeper financial problems down the line.