100% mortgages are back - should you get one?

Just a couple of weeks ago, the Guardian newspaper loudly proclaimed that “100% loans are back” before describing these sorts of mortgages as “controversial”. The claim was certainly interesting as, for most people trying to get on the property ladder in the UK, the biggest hurdle to ownership is saving up for a deposit. From personal experience, trying to get a property of your own can feel like a never-ending cycle of paying high rent while trying to put money aside. That’s why recent headlines announcing that 100% mortgages are back have created so much hype and excitement for many first time buyers

Today, we’re going to explore what this news really means. We’ll explain what these no-deposit mortgages are, who they are targeted at, and the potential risks involved By the end of the article you should be better placed to decide whether it’s the right option for you now that 100% mortgages are back on the market.

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What Exactly is a 100% Mortgage?

A 100% mortgage (sometimes also called a 100% Loan-to-Value (LTV) mortgage) is a home loan where you borrow the *full* value of the property you want to buy. This means you don’t need to put down any deposit from your own savings.

For example, if a property is valued at £300,000, a 100% mortgage would provide the full £300,000 loan. In contrast a more standard 95% LTV mortgage where you would need to provide a £15,000 deposit.

Yes. 100% Mortgages are Back (But There’s a Catch)

100% LTV mortgages largely vanished in the UK following the 2008 financial crisis, but in recent months a small number of UK lenders, mostly building societies and newer challenger banks, have started to offer 100% mortgage products again.

However, the general consensus is that this doesn’t represent a return to the risky lending of the past. Today’s 100% mortgages come with very strict and specific eligibility criteria, designed to reduce risk for both the lender and the borrower. As a result, when you hear papers saying 100% mortgages are back remember these loans always come with some very important small print.

Who Offers Them and Who Are They For?

At the moment, the market for these products is niche and extremely targeted. Lenders are not offering them to everyone; they are typically aimed squarely at first-time buyers who are currently renting and can prove they can afford monthly payments but have been unable to save a deposit.

Key Eligibility Criteria

While specific criteria vary between lenders common requirements for the new wave of 100% mortgages include:

A Proven Rental Track Record
This is the biggest factor. Applicants often need to show at least 12-18 months of consistent on-time rent payments with proof like bank statements. The new mortgage payment will often be capped at or around the level of your recent average rent.
An Excellent Credit History
A strong credit score and a spotless credit report with no missed payments are usually non-negotiable. (Find out more in our guide – What credit score do you need to buy a house?)
First-Time Buyers Only (usually)
These deals are almost always restricted to those who have not owned a property before. In some cases, there are 100% mortgage deals for second-time buyers too.
Stable Income & Affordability
You will still need to pass the lender’s standard affordability checks proving you have a stable income that can comfortably cover the repayments.
Being a Key Worker
In at least one case at the moment, the 100% mortgage deal on offer is only available to key workers like NHS clinicians (nurses, paramedics, doctors, etc), teachers and childcare providers, university lecturers, police officers and armed forces personnel.
Buying a property from a specific developer
In another case, a more attractive 100% mortgage rate is only available to those people buying “new-build home from one of [the lender’s] partner developers”.

In addition to these general criteria, specific lenders have other rules around the properties that can be purchased with 100% mortgages: at least one product currently on the market cannot be used to finance the purchase of a flat.

The Risks Involved

While avoiding the need to save for a deposit is a huge advantage, 100% mortgages carry significant risks that you must carefully consider.

Negative Equity

Perhaps the single biggest risk. Negative equity occurs when the value of your property falls below the amount you still owe on your mortgage. With a 100% mortgage you start with no equity, so if house prices drop even slightly, you are immediately in negative equity. This makes it extremely difficult to move house or remortgage to a new deal until prices recover or you pay down the debt significantly.

Higher Interest Rates

Lenders see 100% mortgages as high-risk so they charge higher interest rates compared to 95% or 90% LTV deals. This means your monthly payments will be higher than if you had a small deposit. Some of the current deals also require you to lock into a longer fixed-rate term such as 5, 10 or even 15 years.

Limited Choice & Risks of Getting Trapped

With only a few lenders offering these products at the moment, there’s not much competition. The result? Probably a less favourable term than one you would get with even a small deposit. Plus, if you find yourself in negative equity when your initial deal ends, you might be unable to remortgage and could be stuck on the lender’s much higher Standard Variable Rate (SVR).

So Should You Get One? A Checklist for Your Decision

The news that 100% mortgages are back is obviously exciting but that doesn’t mean they’re right for everyone. A 100% mortgage might be worth considering only if you meet the strict criteria and can say yes to the following:

Can you afford the higher payments?
The monthly cost will probably be higher than a mortgage with a deposit.
Is your income stable?
You’ll need to be confident in your job security. (check out our guide – how much mortgage can I afford?)
Are you planning to stay long-term?
You should see the property as a home for at least the next five to ten years to ride out any potential dips in house prices.
Have you compared the alternative
Have you calculated how long it might take to save a 5% deposit and compared the overall cost against the higher interest rate of a 100% deal?

The Alternative: Saving for a 5% Deposit

Before jumping at a 100% mortgage, it’s important to think about the alternatives. If you can save even 5% it opens up a much wider market of lenders and products. This increased competition actually means you can access more competitive interest rates which can result in lower monthly payments and a lower overall cost of borrowing.
While saving can be hard it provides a valuable equity buffer from day one and gives you far more choice.

You may find our guide helpful – how much deposit do I need?

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about the specifics of mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation you can:

Important: Your home may be repossessed if you do not keep up repayments on your mortgage.

Source: Guardian