Mortgage Guides

100% mortgages - what are the alternatives?

By Hazel Cottrell and Seamour Rathore seamour@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 27/7/2010)

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 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 100% mortgages have been removed 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?

Borrowers traditionally saved up a deposit before they would be approved for a mortgage. 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.

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.

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 bank wouldn’t be in immediate danger of losing money if the owner was repossessed.

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.

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 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 from day one– where the mortgage owed is more than the property’s value – from day one.

In June 2007, there were 216 100% mortgage products on the market, and 136 products with a loan-to-value ratio of over 100%, according to data from Moneyfacts.co.uk. Today there are eight 100% mortgage products on the market, none of which is available in the UK mainland – they are designed for the Northern Ireland mortgage market. There are no 100% mortgages available.

Why have 100% mortgages disappeared?

100% 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. The Halifax house price index records the average house price was £199,600 in August 2007. Despite moving up a little in the last six months was only £167,570 in May 2010.

This has left many homeowners who 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.”

The second reason why 100% mortgages have been pulled is that the government introduced new capital adequacy rules in January 2008. These mean 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.

Ray Boulger of mortgage broker John Charcol (www.charcol.co.uk) says: “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.”

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

The more a first-time buyer can save up the better. Moneyfacts.co.uk research in June 2010 shows that there are 885 mortgage products available for those with a 25% deposit. If you only have a 5% deposit, then you’ve only got 19 mortgage products from which to choose.

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

Ironically, as interest rates are so low, historically mortgages look like good value, but first-time buyers should beware a variable mortgage as they will feel any base rate rises more sharply.

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

Firstly, there are a growing number of mortgages available up to a 90% LTV ratio. The Yorkshire Bank brought out a two-year fixed mortgage for borrowers at this level and it came without fees plus £500 cashback, if you fall into the first-time buyer category. Use our mortgage calculator to work out what your monthly repayments might be.

Another option for first-times 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 parents offering up their savings to provide security to the lender. One big benefit being that the parent retains the savings in their own name rather than gifting the sum to their offspring.

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.

David Hollingworth of mortgage broker London & Country (www.lcplc.co.uk), says: “This allows 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.”

He continues: “There are 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.

“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.”

In June Barclays-owned Woolwich teamed up with house builder Bovis to offer new-build homes at a 90% loan-to-value.

The risk involved with the deal is handled because the mortgages come with integral unemployment insurance cover for three years. Bovis also provides Woolwich with a indemnity fund to cover possible losses due to repossession.

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 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 increasing the amount of equity you have in your home using the savings in order to remortgage to a better mortgage deal. The more equity you have in your home the better your bargaining positioning if you want to get the best new remortgage deal.

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

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.

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 lose value again.”