What is a 100% Mortgage and How Does it Work?

A 100% mortgage is a mortgage loan that is for the entire value of the property, rather than for a percentage of the value, such as 90%. Essentially, you do not need to save up any money to put down as a deposit.

Just over a decade ago, 100% mortgages were offered by many mortgage lenders, including standard high street banks, not just specialist lenders. By offering 100% mortgages, more people were able to afford to buy a property without the need to have saved up a large sum of money for a deposit. However, the mortgage market has changed, and 100% mortgages are now very rare.

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When you are searching for a mortgage product, you will see that the majority of lenders will require a deposit of at least 5% or 10%. For a property valued at £300,000, this would mean that the mortgage applicant would need to be able to put down a 10% deposit of £30,000. 

For many people, that size of deposit is unachievable, which would mean they would have to look at lower value properties or try to find an alternative mortgage that does not require as large a deposit.

Prior to 2008, lenders would offer 100% mortgages, so no deposit was required from the applicant and in some cases, the lender would even loan more than the value of the property.

Why are 100% mortgages so rare?

In 2008, mortgage regulations became stricter, as regulators identified that high numbers of applicants were being approved for 100% mortgages that they could not afford and then ended up missing payments and even losing their property. 

The stricter regulations have forced lenders to perform a more comprehensive affordability check on applicants and the request for a deposit helps to prevent a situation where there is negative equity. Negative equity, where the outstanding mortgage loan amount is higher than the value of the property, is a bad situation for both the lender and the homeowner, as they both stand to potentially lose out financially.

The new 100% mortgage

Most mortgage lenders now request a minimum of 5% deposit before they will approve a mortgage, which in the UK is an average sum of £10,000.

However, there are some 100% mortgage products but they are not as straightforward as the lender providing 100% of the loan, in the way that lenders historically did. The current 100% mortgage deals on the market do offer a 100% mortgage loan but there are certain requirements that must be met.

One of the requirements will be that you have a good credit score and also that you have somebody such as a relative, who is prepared to act as a guarantor to put down a temporary deposit on your behalf.

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Temporary deposits

There are a few lenders who will provide a 100% mortgage on the basis that a temporary deposit is put down by a guarantor who will usually be a parent or other relative. The deposit is then placed into a savings account that is used to offset against the mortgage. 

The deposit must remain in the account until a set date, usually when the mortgage holder has paid off the same amount of the loan as the value of the savings. The guarantor would not be able to withdraw any money from the account for the set period, but in some circumstances, they may be able to earn interest on their savings while it is held in the offset account.

Using a home as security

Instead of using savings to offset against a 100% mortgage, another option for a guarantor is to use their home as security. This is a more complicated arrangement and if the 100% mortgage holder misses loan repayments, by law, the lender could demand that the guarantor’s house is sold to repay the missed payments.

Usually, the guarantor will need to own the property outright or at least have paid off the majority of their mortgage to be considered for this option.

Advantages of a 100% mortgage

There is one key benefit of being able to obtain a 100% mortgage, which is that you will not be required to save up a large deposit. For many people, a 100% mortgage supported by a guarantor is their only realistic way of owning their own property or being able to afford a property in the price range that they want.

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What are the risks of a 100% mortgage?

The reason that lenders now place requirements such as offset savings or another property as security against a 100% mortgage, is to manage their risk. Rather than the risk lying with the mortgage lender, with these types of 100% mortgages, the guarantor accepts the risk instead.

The risks to them are that they could lose some or all of their savings, or they could even lose their home, if they have agreed to secure the loan against that. Before a guarantor decides whether to agree to the terms of the 100% mortgage, they should consider how big the risk is to them.

They should decide whether the person they are acting as guarantor for will be able to manage their mortgage repayments and will not put their savings or home at risk. If the homeowner defaults, the parent or relative may never get their savings back, so it is a decision that must be taken cautiously. 

Even if the guarantor trusts the mortgage applicant to be responsible with their financial commitment to paying the mortgage, a change of circumstances could mean that they were unable to make the repayments. 

For example, they could lose their job, or their contracted hours could be reduced, lowering their salary. They could split up with a partner who was contributing towards paying the mortgage and then couldn’t afford the mortgage on their own. All of these scenarios should be taken into account.

If the homeowner defaults on their mortgage, as well as losing out financially, the guarantor could also have a difficult situation to deal with, in regards to damaging their relationship with their child or relative.

Potential negative equity

Other risks with a 100% mortgage include that the potential for there to be negative equity is higher. If the outstanding loan amount is £250,000 and the property market dips, the property could very quickly lose value and after six months, the loan would still be close to £250,000, while the value could be £235,000, for example.

The quicker that you pay off your mortgage, the less chance of negative equity, unless there is a dramatic crash in the property market.

Higher interest rates

One of the disadvantages of taking out a 100% mortgage is that most of these products are only available at higher interest rates than standard mortgages. You might also find that it is much more difficult to find this type of mortgage, so you could spend a while trying to find one, unless you work with a whole-of-market broker, such as Boon Brokers.

No guarantor

The main dependency of being able to obtain a 100% mortgage is that you have somebody who agrees to act as a guarantor and take on the risk themselves.

Even then, they will need to meet the criteria to make them eligible for being a guarantor, including good credit history and having enough savings or equity in their property to offset against the loan.

If you do not have someone willing to be a guarantor and who qualifies to be one, then you will not be able to obtain a 100% mortgage.

What alternatives are available?

There are a number of additional options still available even if you are not able to have a 100% mortgage approved, including:

Low deposit mortgages

If the idea of saving up a 20% deposit is out of the question, there are mortgage deals for lower deposits of either 5% or 10%. The mortgage lending market adapts frequently to reflect the strength of the economy and to protect lenders from new risks that may appear, such as the COVID-19 pandemic. In one or two years, there could be more low deposit mortgage deals available. There might even be more 100% mortgage options if you choose to wait a while.

The other factor that could help you to buy a house is if the housing market dips and house prices start to come down. If you are still earning the same amount, you will find it easier to find a property you like at a lower value, which would also mean a smaller deposit would be required. For example, if a property was worth £250,000 in 2021 but in the next year sees a decline in value to £230,000, a 5% deposit would be £11,500 instead of £12,500.

Help to Buy or Shared Ownership

Other options that can help you to get onto the property ladder include the government schemes Help to Buy and Shared Ownership. There are a few different schemes available, such as the Mortgage Guarantee Scheme launched in April 2021, where a 5% deposit is required. There is also the Help to Buy: Equity Loan, where the mortgage applicant buys a new-build property that is available under the scheme and the government lends up to 20% of the purchase of the property. A 5% deposit would be required under this scheme too.

Shared ownership allows you to purchase a percentage of a property. You would search for the properties where this option is available and typically, you could own 60% of the property and you would pay rent on the 40% share. This arrangement can get a bit complicated if you want to sell the property, but it is a good way of getting onto the property ladder without saving up a big deposit.

Deciding if a 100% mortgage is right for you

A 100% mortgage can be the ideal option for people who have a guarantor but there are many risks to consider, especially the consequences of missing payments on the mortgage. Instead of facing the financial repercussions yourself, your guarantor would also be negatively impacted, so you have to decide between you whether that is a risk you want to take.

If you are not in an urgent situation where you need to buy a property immediately, waiting for more mortgage products to become available could work in your favour. It could also give you more time to save up some deposit, so that you have more options available in 12 months or however long you decide to wait.

The mortgage market can change quickly, so just because there are no options for you right now, that does not mean that you will never be able to afford your own home. 

Before you consider applying for a 100% mortgage, or any other financial product, it is advisable to talk to an independent broker for advice. They will be able to explain all of the current options available to you, including government schemes and they will be able to make you aware of any potential risks that you may not have considered.

Contact the Boon Brokers mortgage team for expert, fee-free and impartial advice on whether a 100% mortgage is right for you or whether another product would be more suitable.

Gerard BoonB.A. (Hons), CeMAP, CeRER

Gerard is a co-founder and partner of Boon Brokers. Having studied many areas of financial services at the University of Leeds, and following completion of his CeMAP and CeRER qualifications, Gerard has acquired a vast knowledge of the mortgage, insurance and equity release industry.