100% Mortgages - the benefits and pitfalls
Before the banking crash of 2008 when global financial markets were brought to their knees, 100% mortgages were widely available. Since the financial crash of 2008, the number of high loan to value mortgages available has been almost non-existent. Although 100% mortgages have made a comeback, until recently, they had to be supported by a guarantor. That meant borrowers had to rely on someone else to guarantee their obligations of the mortgage in case they defaulted. The Skipton Building Society has now announced the availability of a 100% mortgage without the need of a guarantor. This mortgage is available to those with at least a 12-month rental history and a good credit rating. Of course, the normal affordability tests will also be carried out.
What are the benefits of a 100% mortgage?
For those looking to get onto the housing ladder, one of the main challenges is the ability to make up the deposit. This especially impacts those in rented accommodation where high rents make it difficult to save for a deposit. Also, in many parts of the UK, it is more expensive to rent than buy. That means buying a property and taking on a 100% mortgage reduces your monthly expenditure.
For those with no deposit, getting on the housing ladder means they can buy an asset which is likely to appreciate over the years. So, as the mortgage reduces and the value of the house increases, it means they will be able to build up equity in the house to use as a deposit in a future house move.
If you do not need to find a guarantor, it means you can look to purchase independently. Clearly, any guarantor must think carefully about offering a guarantee to a lender where there is significant risk to their own assets should the lender be unable to recover the outstanding loan if the borrower defaults. The latest offering from the Skipton Building Society means no guarantor is needed which will streamline the application process.
What are the pitfalls of a 100% mortgage?
Whilst there are clearly benefits for those first-time buyers looking to get onto the housing ladder, there are risks too. Getting the new Skipton Building Society 100% mortgage is not entirely straightforward. The prospective borrower needs to have been in rented accommodation for at least 12 months and have a record of paying the rent on time and in full. In addition, the prospective borrower needs to have a good credit rating. Having satisfied that criteria, the normal mortgage tests will apply, and these will include affordability scoring.
100% mortgages carry a higher interest rate. That means you would pay more than a borrower who borrows the same amount but who has a deposit to put into the equation. If interest rates increase, there is the possibility that the mortgage will become unaffordable. However, this is not unique to 100% mortgage borrowers!
As there is clearly no equity in the property when you first buy, if you default on your mortgage repayments, you will very quickly go into a negative equity situation. This is when you owe more in your mortgage than the value of the house. If you do miss any mortgage payments, it is essential you speak with your mortgage provider and explain your circumstances. Do not dig your head in the sand! Mortgage lenders will do what they can to help you out.
If the property market falls, you might also discover that your loan is higher than the value of your property, thus locking you into a house and being unable to move. Given that the property market generally increases over the long term, this usually irons itself out if you can manage to stay the course till the property market starts to move up again.
Where can I get advice about this?
Here at Paris Steele, our solicitors specialise in helping clients to buy and sell houses every day. We do not provide financial advice. However, if you do need advice about a mortgage, we recommend you speak to your own financial adviser or if you require assistance, we have a long-standing relationship with a local advisor who will be able to help. Please contact us so that we may discuss your requirements.
If you would like to discuss any aspect of a house purchase or sale, please contact us.