The Return of the 100% Mortgage But is it a Smart Idea?

Just prior to the financial crisis hitting in 2007, 100% mortgages were easy to find. Indeed, over 250 such mortgages were available at that time. Things changed once the financial crisis developed, however, and those deals vanished, virtually overnight.

So, you would be forgiven for being concerned that some lenders are now offering these same 100% mortgages again today. Big-name lenders including Barclays and the Post Office are now offering these deals, although they come with a condition. To get the deal, chiefly aimed at those wanting to get onto the property ladder for the first time, a family member must be willing to become a guarantor against the loan.

No deposit required – but a risk to family dynamics?
27% of first-time buyers are resorting to the Bank of Mum and Dad to help them get onto the housing ladder. This is according to research completed by the Centre for Economics and Business Research (CEBR) and Legal & General.

However, the same study has revealed the total amount of lending has dropped. The average contribution from parents last year was £22,000, and this year has seen a reduction to £18,000 – a drop of 17% on average.

This may have fuelled the rise in 100% mortgages using parents or other family members as guarantors. In this scenario, parents can use the equity in their own property to meet the terms of the deal. However, if something goes wrong and their children cannot afford to meet the mortgage payments, it will put their parents’ homes at risk as well as their own.

A risky form of lending
“The requirement to have someone as a guarantor for the loan sets this 100% mortgage apart from the originals we saw before the financial crisis,” said Darren Pescod, CEO of The Mortgage Broker Limited. “However, it is still very risky to go down this route. If house prices fall, the risk of negative equity will become a very real one for these buyers. This is a key reason why a 100% mortgage is far from ideal.

“Furthermore, it puts the parents’ property at risk if something should go wrong. While the first-time buyers will need to meet the far stricter criteria in place today for would-be mortgage holders, there are still considerable risks involved with a mortgage that doesn’t require a deposit. And none of this begins to touch on the negative effects it would have on family relationships should things go wrong.”

High deposits are hard to save for
This is the main reason why these 100% mortgages are making a comeback. However, there are tougher affordability rules in place that were not present when the financial crisis occurred in 2007. Perhaps this will make the difference today. If the housing market should crash, however, there is every chance many will find themselves struggling with negative equity, just as many did over 10 years ago. Clearly, considerable thought must be applied before considering one of these mortgages today.

Published on 16 March 2020

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