Mortgage Guides

100% mortgages - what are the alternatives?

Updated: Tuesday 29 November, 2011

By Martin Fagan

The demise of 100% mortgages has left many people struggling to remortgage and others without deposits unable to get on the housing ladder. What options are left?

Three years ago, 100% mortgages were a booming business for lenders keen to get new borrowers onto their books. First-time buyers without a deposit often opted for these deals, which allowed them to borrow 100% of a property’s value. In an era of rising house prices, this didn’t represent too much of risk for lenders - but the credit crunch changed everything.

Since the middle of 2007, mortgage lenders have been tightening their lending criteria and increasing their deposit demands. Now, the banking crisis, falling house prices and the recession have meant lenders have removed 100% mortgages from the market.

In this guide we’ll look at alternatives for first-time buyers without a substantial deposit. We will also consider remortgaging options for those with little or no equity in their home.

• What were 100% mortgages?
• Why have they all disappeared?
• What are the alternatives to 100% mortgages for new buyers?
• What are the alternatives for remortgaging a 100% mortgage?
• Will 100% ever mortgages return?

What were 100% mortgages?

Traditionally, before they would be approved for a mortgage, potential borrowers saved up a deposit. This gave lenders security; if the borrower defaulted on repayments and the property had to be repossessed, then the bank was likely to get back all the money it lent.

However, 100% mortgages meant there was no need for buyers to save up a deposit before getting on the first rung of the housing ladder, so they understandably became very popular with first-time buyers struggling to save enough money for a deposit.

The percentage of the property’s value lent as a mortgage is known as its loan-to-value (LTV). So if you have a 20% deposit and need to borrow 80% of the property’s value, your LTV would be 80%.

But when house prices were rising, a number of lenders were willing to lend borrowers 100% of the property’s value. They did this because if house prices continued to rise, the LTV would drop accordingly. For example, if a bank lent £100,000 to buy a £100,000 property and within six months the property was worth £120,000, the bank wouldn’t be in immediate danger of losing money if the owner defaulted on their mortgage and the property was repossessed and had to be sold to recover the debt.

However, because of the increased risk to the lender, 100% mortgages were charged at a higher rate than mortgages where the borrower put down a deposit. In some cases the 100% borrower also had to pay for a mortgage indemnity guarantee (MIG), a form of insurance which benefited the lender if the house purchaser defaulted on the mortgage and the property was worth less than the mortgage secured on it and sold, so the lender wouldn’t be out of pocket.

During the house price boom, mortgage providers even offered mortgages up to 125% of the value of a property. This meant the house buyer had cash to pay for the extra costs involved with purchasing a house such as solicitor and valuation fees. It also allowed them the option to furnish their home without the need to build up any savings in a deposit account.

During the height of the property boom in 2007, Northern Rock, Coventry Building Society and Birmingham Midshires all offered “100%-plus” mortgages. These mortgages were always risky, as borrowers were effectively in negative equity - where the mortgage owed is greater than the property’s value - from day one.

In June 2007, the number of 100% mortgage products on the market was 216 and a further 136 products with a loan-to-value ratio of over 100%, according to data from Moneyfacts.co.uk. Today, like the yeti, many people swear 100% mortgages are out there, but no one has actually found any evidence to prove they actually exist anymore.

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Why have 100% mortgages disappeared?

These mortgages are only viable when house prices are rising. In a falling market someone with a 100% mortgage would be in negative equity straight away.

House prices peaked in August 2007 and have generally declined since then. In August 2007, the Halifax house price index recorded the average UK house price at£199,600. In September 2011, the average UK property price as measured by the Halifax house price index was £161,132, a fall of 19% in a tad over four years. This has left many homeowners who bought at the peak of the house price cycle in negative equity with a mortgage debt that exceeds the value of their house.

In an uncertain market, allowing customers to borrow more than the property would potentially be worth is a risky proposition and a lender repossessing and selling a property for less than the outstanding debt is a lender making a loss.

Another reason why 100% mortgages have been pulled is the introduction by the government in January 2008 of new capital adequacy rules. These mean that for every £1 lenders advance over 75% LTV, they have to put away a certain amount of money to offset the risks and ensure the lender’s assets (including the property they lend money on) squares with its liabilities, and this erodes the profit they make on these deals.

This has two major impacts. Firstly, it makes it much more expensive for the lender to offer a high LTV mortgage, which is why borrowers have to pay the premium for any LTV above 75%. Secondly, for every mortgage at 90% LTV a lender makes, they could offer eight to 10 mortgages at 60% LTV and the more mortgages they can sell, the more opportunity they have to cross-sell other products like insurance and loans for home improvement.

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What are the alternatives to 100% mortgages for new buyers?

The more of a deposit a first-time buyer can save up, the better. This is because the greater percentage of the property’s purchase price you can put down as a deposit, the wider the choice of mortgages available to you and the better the deal you can find.

Borrowers that save up a 40% deposit will have access to the very best deals, but they’ll also need a good credit history to access them.

Ironically, as interest rates have been at an historic low of 0.5% since March 2009, mortgages currently look like good value, but first-time buyers on a variable mortgage should beware, as they will feel any base rate rises more sharply than borrowers on a fixed rate.

If you don’t have a 25% deposit, but are still determined to buy, there are some tactics you could employ.

Firstly, while in the last few years the highest LTV available through the mainstream lenders was 75%, in recent months there has been a growing number of mortgages available up to a 90% LTV. Use the Creditchoices.co.uk mortgage calculator to work out what your monthly repayments might be.

Another option for first-timers is getting help from parents. A number of lenders have looked at ways to offer a larger mortgage subject to parents offering up their savings to provide security to the lender. One big benefit of this is the parent retains the savings in their own name rather than gifting the sum to their offspring. These are called “guarantor mortgages” - read our guide on how to get a leg-up onto the property ladder for more information.

In early September this year, there was a frisson off excitement in the financial press when a mortgage offering homebuyers the chance to borrow 100% of the cost of their property was launched by banking newcomer, Aldermore.

However, a closer look showed the 100% home loan was only available if a family member was willing to guarantee any borrowing above 75% of the property’s value. So the “100% mortgage” was, in fact, just another spin on a guarantor mortgage.

Another option worth looking into is shared ownership. Here, the buyer takes on a mortgage representing 25%-60% of the value of the home; the rest is owned by a housing association and the buyer pays rent on that portion.

This allows an initial share in the property to be purchased and then offering the opportunity of a gradual step up to full ownership as time goes on and the borrower’s circumstances alter.

There are other options like shared equity through a government scheme in partnership with the major property developers that help by providing a deposit in the shape of an equity loan through.

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What are the alternatives for remortgaging a 100% mortgage?

For many people who took out 100% mortgages several years ago, their fixed-term may be coming to an end and they might be considering remortgaging. If they don’t, in most cases they are likely to be transferred onto their lender’s standard variable rate (SVR). At the moment SVRs tend to be good value so this might not be a bad thing - that is, until the Bank of England base rate start to rise.

People who took out high LTV mortgages a couple of years ago and are in negative equity as a result of the fall in house prices will find that there will be very few options available from other lenders in the market.

This will mean that they will either revert to a follow-on rate (probably SVR) or will have to rely on their existing lender coming up with some kind of follow-on deal. Failing that, borrowers could look to make overpayments in order to help drive down their debt more quickly and in turn improve their LTV position in the future.

If you already have a 100% mortgage and you are in negative equity, it should not be a problem unless your payments become unaffordable. If you do need to remortgage or move house, approach your lender first as many are able to switch you to a more suitable deal, although many don’t publicise it.

If you have a 100% mortgage but also have some savings, it could be worth increasing the amount of equity you have in your home by using the savings as a deposit in order to remortgage to a better deal. The more equity you have in your home, the better your bargaining positioning if you want to get the best remortgage deal possible.

Compare mortgages to see whether you could switch to a cheaper mortgage.

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100% mortgages - will they ever return?

It might seem unlikely at the moment, but some experts believe that we could see the return of 100% mortgage deals one day. The conditions would have to be right though, and that means rising property prices and greater availability of mortgage finance.

The majority of housing market analysts and commentators believe it will take a very long time for the market to return to a more healthy state, but lenders will be much more risk averse and so 100% mortgages may make a return, but certainly not in the numbers last seen in 2007.

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