Not all that long ago, 95% and 100% mortgages were getting people into financial difficulties. They disappeared from the market for a while but 100% mortgages are now making a comeback.
Are they a good idea?
They actually could be if you do it right.
Ignoring the current interest situation right now, as that will pass, looking longer term, larger mortgages can work for some.
Skipton Building Society were first to market back in May with a 100% mortgage. It offers a full, no-deposit mortgage that didn’t require a guarantor for anyone who could qualify.
It was apparently the first 100% mortgage since 2008 and received more positive headlines than you might think.
Is a 100% mortgage a good idea?
Yes, for once, a 100% mortgage could be a good idea. As long as you can afford it.
With house prices being what they are and rents being at an all-time high, this mortgage could provide the escape many people are looking for.
Just keep an eye on interest rates!
It has always been a little absurd that people paying £800 per month in rent couldn’t qualify for a mortgage of the same amount.
If you have been renting for years and have never missed a payment, why should you not be able to get a mortgage that costs the same?
It came partly down to risk but also down to the deposit.
Saving for a deposit has always been difficult for those without generous parents and was the main blocker to getting a mortgage. People were stuck in the renting cycle forever, with no obvious way to escape.
Which is where a 100% mortgage comes in.
In fact, that first 100% mortgage from Skipton was designed for that very purpose. To help renters buy their first home.
The downside is that you can only borrow up to the equivalent of what you’re paying in rent right now.
That’s fine for many, but if you’re staying at home with your parents, it’s not going to help.
What to look out for with a 100% mortgage
So far so good right? You can pay the same as you’re paying now, for your own mortgage rather than paying off your landlord’s.
But there are a couple of things to look out for when shopping for a 100% mortgage.
Interest rate
As you can imagine, a 100% mortgage is a higher risk offer than a traditional mortgage. That means the lender is going to offset that risk with a higher interest rate.
While rates change all the time, typical 100% mortgages charge 1-2% more than even a 95% mortgage.
That’s a lot of interest over time just for not having a deposit, especially when rates are higher than in recent history.
Negative equity
Having a deposit protects you a little from a drop in house prices and stops you going into negative equity. That’s where the value of your home is worth less than the mortgage.
We have seen house prices drop over the past year and we just don’t know where they are going next.
They are unlikely to drop too far, as too many people need somewhere to live, but it’s definitely something to keep an eye on.
If you could scrape together a 5% deposit, you insulate yourself from a price drop of 5%. Even though prices have dropped a little in some places around the country, a sustained drop like that is unlikely to last very long.
Early repayment charge
If you manage to save some extra money, enough for a traditional mortgage, you may not be able to change it for a while.
Many 100% mortgages include early repayment charges for the first 2 years.
While not an issue for everyone, it means you’re stuck with the product for the foreseeable future.
Many mortgages include early repayment charges so they aren’t unique to 100% mortgages. It’s just something you need to be aware of.
Managing your money
As you can see, 100% mortgage can be a good idea if you’re currently renting and cannot save for a deposit.
In many situations, you’re far better off paying your own mortgage rather than your landlord’s.
It isn’t all good though. You still need to make sure you can afford the mortgage. You still need to ensure you can stick with it for that fixed period of time and pick your property well.
If you can do all those things and are only paying the same each month in mortgage payments as you were in rent, it could be a very good idea!
