Are 100% mortgages too good to be true?

May saw the introduction of 100% mortgages for first-time buyers which have made the property ladder seem easier to access for many. But, are they too good to be true? We explore no-deposit mortgages in more detail in our latest blog. 

What is a 100% mortgage?

Standard mortgages require a deposit of around 5-10%. But, a 100% mortgage, also known as a no-deposit mortgage, is a type of mortgage that allows you to borrow the full amount for the property you are buying – without having to put down a deposit. So, if the property costs £200,000 you could receive £200,000 in borrowed money. 

Years ago, there were a few different types of 100% mortgages on the market but many required a friend or family member to be the guarantor. The 100% mortgage released in May doesn’t require this. 

Skipton’s 100% mortgage without guarantor 

Skipton Building Society, who released a 100% mortgage in May, got everyone talking because they don’t require a guarantor. The offer includes a five-year fixed deal with a maximum term of 35 years and a 5.49% rate. Buyers can borrow up to 4.49x their income, up to a maximum loan of £600,000. 

The mortgage is only available to first-time buyers, over the age of 21, currently renting and buyers will need to prove they have been paying rent for the past 12 months with no missed payments. Buyers must also prove they have paid household bills for at least one year within the last 18 months. Finally, the mortgage cannot be used on a new-build flat. 

The benefits of 100% mortgages

If you meet the above eligibility criteria, then a 100% mortgage could help you to get onto the property ladder once and for all. It can’t be denied there are plenty of advantages to this type of mortgage either including:

  • No need for a deposit 
  • It helps you to own your home 
  • You don’t need endless savings 
  • No need for a family guarantor 
  • Offers independence and control over your finances

The risk of a 100% mortgage

As with any big decision, it’s important to weigh up the potential risks. And now many have begun to wonder whether 100% mortgages are too good to be true. For starters, not many lenders on the market are offering these types of mortgages which means the rate won’t be as competitive as there are less options to choose from. 

On the topic of mortgage rates, 100% mortgages do typically come with higher monthly payments. This is because the higher the deposit, the less your mortgage payments will be every month. So, before taking a 100% mortgage out, it’s important to consider whether you can really afford it. 

Another risk associated with 100% mortgages is the issue around negative equity. With these types of mortgages, you’re effectively purchasing a property without any stake in it. So, if prices fall, you risk your mortgage being more than the value of the house which is known as negative equity. Those in this position will find it harder to sell or remortgage. 

So, what’s the alternative? 

Of course, if you meet the criteria for a 100% mortgage and feel that it is right for you, then that’s great. But, if you are concerned about these types of mortgages, you’ll be pleased to know that there are plenty of other ways you can get your foot on the property ladder. For starters, there’s a 95% mortgage which requires a 5% deposit of the property’s value and at least means you’ve got equity in the property. 

Or, you could use a Lifetime ISA, a government backed scheme, which allows you to save a maximum of £4,000 a year which is then topped up by 25%. You can either combine this with someone else’s LISA or, after a few years, when you have enough money for a deposit, you can get in touch with a mortgage advisor to see which deals are best suited for you. 

On that note, at Kaytons, we know and trust a mortgage advisor who has successfully helped plenty of people in Manchester and Salford to become homeowners, including first-time buyers. So if you have any questions or want to be put in touch, drop our team a message today and we’d be delighted to introduce you.

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