100% mortgages

A 100% mortgage is, quite simply, a loan for 100 per cent of a property’s value.

The good news is that these mortgages do not require a deposit from the borrower. The bad news is they are virtually non-existent today.

Apart from the colossal amount of lending involved, 100% mortgages work the same way as other more mainstream loans. The lender enters an agreement with the borrower to lend money to finance the purchase of real estate.

The lender will arrange for the borrower to repay, based on the borrowers’ circumstances, some of the loan each month with interest. 100% mortgages can be arranged as fixed-rate deals, which mean the interest is set for a certain amount of time – such as five years – and will not change.

After this time the borrower can choose to switch to the lender’s standard variable rate (SVR), which can change at the lenders’ discretion at any time. Or they can shop around for another deal. Alternatively the mortgage can be set up as a tracker mortgage, where the rate goes up or down at the same rate as the Bank of England’s base rate.

Who are 100% Mortgages for?

100% mortgages tend to be for people who are in a hurry to get onto the property ladder but who don’t have enough savings to put down as a deposit.

Your average 100% mortgage borrower will usually be a first-time buyer, they might also be divorcees or people who have been renting in very expensive areas and haven’t had the income to save for a deposit.

With house prices soaring to such unsustainable levels up until the end of 2007, deposits of even 10% would have been impossible for many first-time buyers to scrape together. So 100% mortgages were the only option for many people.

Pitfalls of 100% Mortgages

The main pitfall with 100% mortgages is the borrower being unable to afford to keep up with repayments. This usually happens because the deal they originally had with their mortgage lender has come to an end. When this happens the borrower is placed on the lender’s SVR which is often much higher than the original rate they were paying and can mean a significant jump in their monthly repayments. The option for the borrower at this point is to remortgage.

However, there is an added danger that the property they bought has lost value putting the borrower in negative equity. If this happens, whether they successfully remortgage they will find themselves owing their original mortgage lender the difference between the loan they took out – minus the repayments they made on the original loan – and the remortgage they now have. Meanwhile, if they sell the property and return to the renting they will still owe their mortgage lender money.

Where to buy 100% mortgages

Borrowers have traditionally gone down all the normal routes to buy these. They could be bought directly from the lender – by going to a bank, building society or specialist lender.

Many people also chose to go to a mortgage broker who can search for the best mortgage deals and offer independent advice based on the individual’s circumstances.

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