is it the end for the 100% mortgage?

For first-time buyers looking for a way to finance their step onto the property ladder, the environment just got even tougher. The impact of the recent credit crunch has led to a whole swathe of lenders withdrawing mortgage products from the market, with 100% mortgages, in particular, fast becoming a dying breed.

  • what is a 100% mortgage?

  • The premise of a 100% mortgage is that the consumer borrows the full amount of the property value from their lender. It has never been one of the most competitive ways to borrow money for a house purchase, offering little product choice and often involving significantly higher interest rates compared to a 95% or 90% mortgage deal. Typically, borrowers are also charged a higher lending fee premium, although many lenders allow you to add this fee to the mortgage itself. While this can be helpful in the short-term, this does mean that you will be paying interest on the fee for the whole term of the mortgage.

  • why do borrowers take out a 100% mortgage?

  • In the past, 100% and even 125% mortgages were a popular way for cash-strapped first time buyers to get a foot on the property ladder, providing the opportunity for buyers to use what cash they did have to spend on the property itself for home improvements, decorating and so forth. Although there were concerns about lending 100% of the property value at the time, these were largely ignored by lenders in a climate of high housing demand, rising house prices, high employment and controlled inflation levels. However, no-one saw the US sub-prime housing crisis coming and the situation has since changed radically and possibly irrevocably.

  • why are these products being withdrawn from the market?

  • Those who took out a 100% or 125% mortgage have been left increasingly exposed. Many have little or no equity in their homes, while others are saddled with huge debts and are increasingly facing negative equity as house prices start to fall.

    As a result, these products have been withdrawn from the market as banks react to fears over lending to ‘high-risk’ consumers and as it has become increasingly expensive for banks to borrow on the inter-bank lending markets. In April 2008, Abbey became the last mainstream lender to withdraw its range of 100% mortgages, citing poor market conditions as the driver.

  • can I still get a 100% mortgage?

  • Virtually all mortgage lenders now require a deposit from a borrower in order to be able to lend to them. Prior to August 2007, just under half (47%) of all mortgage deals required a deposit of 5% or less. By May 2008, only 12% of the deals on the market were accepting deposits that small. Over half of the market (53%) now requires a deposit of 10% or more, compared to 27% in August 2007.

    Indeed, the best rates available are now almost exclusively attached to mortgages requiring deposits of 10% or more, leaving borrowers with smaller deposits less and less choice.

    So, is it the end for 100% mortgages? At the time of writing (May 2008), there is only one lender offering a 100% mortgage, Bristol & West, compared to a year ago, when there were 104. However, those looking to apply to Bristol & West for a 100% mortgage will have to provide a guarantor (most likely the parents of those taking out the mortgage) if they wish to borrow from them.

    The current market conditions, and, in particular, the recent trend of falling house prices across the country, have not created a conducive environment for either lenders or consumers to go with 100% mortgages, as the risks have become so much higher.

    With that in mind, many commentators believe that 100% mortgages will never return to the mainstream lending market.

  • what are the alternatives to 100% mortgages?

  • The most obvious answer is to play the patience game and save up for a decent deposit before embarking on your mortgage journey. As difficult as this may be in the short-term, the long-term picture will provide more financial benefits for those in the best position to capitalise on them. To give yourself the best chance of securing a competitive mortgage rate, aim for a minimum deposit of at least 10% of the purchase value.

    Another alternative is to pool your resources with friends. This has become increasingly popular over the last few years, as house prices have increased. Co-buying provides the opportunity for you to share the costs of buying a property, including the deposit you can offer for a mortgage. Read our guide to buying a property with friends for more information.

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    Although the demise of the 100% mortgage can be interpreted as yet another blow to first-time buyers, many experts believe that their demise will help protect future borrowers from the vulnerability many current 100% mortgage homeowners are now facing as the full impact of the credit crunch unravels.