Mortgage Guides

100% mortgages - what are the alternatives?

By Hazel Cottrell and Emma Lunn hazel.cottrell@consumerchoices.co.uk

The death of 100% mortgages has left many people struggling to remortgage and others unable to get on the housing ladder. What options are left? (Updated 29/9/2009)

100% mortgages were booming three years ago. 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 unfortunately the credit crunch changed all that.

Since the credit crunch began mortgage lenders have been tightening their lending criteria and increasing their deposit demands. Now, the banking crisis, falling house prices and the onset of recession have caused providers to take 100% mortgages off the market completely.

In this guide we’ll look at the death of the 100% mortgage and consider 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?

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What were 100% mortgages?

Traditionally mortgage lenders always requested that borrowers saved up a deposit before they were lent money to buy a property. This gave lenders security; if the borrower defaulted on repayments and the property had to be repossessed then the bank was likely to get all the money it lent back.

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 so 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 effectively drop. For example, if you lent someone £100,000 to buy a £100,000 property and within six months the property was worth £120,000 the LTV would fall to 83%.

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 became very popular with first-time buyers struggling to save money.

However, 100% mortgages were generally more expensive than mortgages where the borrower needed a deposit, and in some cases the 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.

Some 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 to furnish their home without ever having built up savings.

During the boom 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 more than the property’s value – from day one.

According to the Council of Mortgage Lenders in 2006, around 22,000 mortgages (2% of all home loans that year) were taken out at 100% or more of the property’s value.

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Why have they all disappeared?

There are two main reasons why 100% mortgages have disappeared. Firstly, the Government introduced new “capital adequacy” rules in January 2008. This means lenders have to put away a certain amount of money for every £1 they lend over 75% LTV and this erodes the profit they make on these deals.

“Generally lenders need eight to 10 times more capital to support even a 90% LTV mortgage compared to a 60% one and for a 95% or 100% mortgage the capital requirements are even more onerous,” explains Ray Boulger of mortgage broker John Charcol (www.charcol.co.uk).

He continues: “This has two major impacts. Firstly it makes it much more expensive for the lender to offer a high LTV mortgage, which is why the premium borrowers have to pay for any LTV above 75% is very high, and of course it gets progressively worse as the LTV increases. Secondly, for every mortgage at 90% LTV a lender makes they could offer eight to 10 mortgages at 60% LTV and of course the more mortgages they can sell the more opportunity they have to cross sell other products.”

The other reason why 100% mortgages have disappeared is that they are only viable when house prices are rising. In a falling market someone with a 100% mortgage would be in negative equity straight away – not a good situation.

House prices peaked in August 2007 and have generally declined since then. According to the Halifax house price index the average house price was £199,600 in August 2007 but stands at just £160,973 now.

This has left many homeowners that bought at the peak in the house price cycle in negative equity with a mortgage debt that exceeds the value of their house.

Katie Tucker, technical manager at broker MortgageForce (www.mortgageforce.co.uk), says: “When house prices are likely to fall, it would be irresponsible to allow customers to borrow more than the property would potentially be worth, if they were unable to make their repayments and needed to sell it. Plus, the lender would make a loss after costs if they could only repossess and sell a property that is worth less than an outstanding debt.”

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

For first time buyers, the more you can save up the better as most lenders now require at least a 10% deposit. The bigger deposit you have, the better deal you are likely to get as you will be seen as lower risk. Borrowers that save up a 40% deposit will have access to the very best deals – but they’ll need a good credit history too.

Some commentators say now’s a good time to buy as prices have gradually started to rise again and the lowest point in the house price cycle might be behind us. Interest rates are still low too so there are some good deals to be found.

In August, the Building Societies Association (www.bsa.org.uk) “Property Tracker” found that an increased proportion of people believe that now is a good time to buy. 59% of people agree or tend to agree that now is a good time to buy, compared to 54% in March and just 27% in June 2008.

But if you haven’t built up a sufficient deposit, and you can’t wait to buy any longer, there are options you can consider.

Firstly, there are still some mortgages available up to a 95% LTV ratio. However it’s important to remember that for mortgages over a 90% LTV ratio you are likely to be forced to pay higher rates. Use our mortgage calculator to work out what your monthly repayments might be.

Another option for first-time buyers is getting help from parents. Lenders such as Lloyds TSB and Skipton building society have looked at ways to offer a larger mortgage subject to taking a charge on parental savings, one big benefit being that the parent retains the savings in their own name rather than gifting it to their child.

“Other options like shared equity through government schemes like Homebuy Direct and major developers help by providing a deposit in the shape of an equity loan,” says David Hollingworth of mortgage broker London & Country (www.lcplc.co.uk).

“These are likely to be very popular and could work well although the borrower needs to be sure that they understand all the small print. Other options like shared ownership will also offer potential routes to home ownership, allowing an initial share to be purchased and then allowing a gradual step up to full ownership as time goes on and the borrower’s circumstances alter.”

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What are the alternatives for remortgaging a 100% mortgage?

For many people who took out 100% mortgages a couple of 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 are low compared to historical rates so this might not be a bad thing – that is, until rates start to rise.

“Those that have taken 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 no options available from other lenders in the market,” says David Hollingworth.

“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. On the upside the base rate has plummeted so the SVR is certainly much more affordable now. 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.”

Katie Tucker says: “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, although they don't advertise it.”

If you have a 100% mortgage but also have some savings it could be worth using the savings as a deposit in order to remortgage to a better mortgage deal. The more money you can put towards your mortgage the better.

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

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Will 100% mortgages ever return?

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

David Hollingworth says: “You can’t say that we’ll never see 100% mortgages ever again but it will take a very long time for the market to return to a more healthy state and lender attitude will be much more risk averse going forward. It will therefore be a long time before 100% is contemplated and at the moment a return to 90% lending would be a step forward in many cases.”

Katie Tucker says: “100% mortgages might come back in the form of a 95% mortgage with 5% personal loan, particularly if property values are so strong that lenders can demonstrate the uplift in buyers would boost the economy, and that they have better safety nets this time for what happens if properties loose value again.”