Before the UK recession hit in 2008, 100% mortgages - where you could borrow the entire value of your home - were pretty common. At one point, you could even borrow up to 125% of your home’s value if you were lucky. It’s every hopeful home owner’s dream, right? But the risky nature of these loans caused banks and lenders to tighten up their lending criteria and actually review potential buyers’ affordability before doling out thousands of pounds. These days, most lenders require a deposit of at least 5% or 10% before they give you a penny.
A decade later, and the 100% mortgage is back - but not as you know it. It’s set to be popular (perhaps unsurprisingly, considering that the average deposit put down by first-time buyers has reached more than £33,000).
If you’re hoping to buy your first home, find out what this new mortgage has to offer, and whether the benefits outweigh the risks.
What’s the new 100% mortgage all about?
Here’s how it works:
- Lloyd’s Bank have introduced the ‘Lend a Hand’ scheme, aka a 100% mortgage (Barclays have also launched a similar offering)
- You can borrow up to £500,000 to buy your first home
- You can pay it back over a period of up to 30 years
- The interest rate is 2.99%, fixed for three years
- You need to be a first time buyer who’s living and buying a home in England or Wales.
- The Lend a Hand Mortgage can’t be used for interest-only mortgages, New Build, Right to Buy, shared equity, or shared ownership
But this mortgage comes with a big caveat: first-time buyers can borrow up to 100% of the value of their home, on the condition that a family member is willing to tie up 10% of the property value for three years as a safety net. If you miss any repayments on your mortgage, the bank is allowed to dip into this pot to cover the owed costs.*
Over these three years, your relative’s money will earn interest at 1.5% above the base rate, which is a pretty good deal. Once this time is up, they can retrieve their cash and you can either switch to the bank’s standard variable rate (SVR) or look for a new mortgage - it’s up to you.
Ultimately, unless you have a (very generous) relative willing to cough up the cash, you won’t be able to take advantage of Lloyd’s 100% mortgage. While more than a third of young people rely on the Bank of Mum and Dad to buy their first home, this may come as a kick in the teeth for lower income families.
What are the risks?
While it might be a cliche, there really is no such thing as a free lunch! If something sounds too good to be true, it likely comes with a catch.
One of the biggest risks with 100% mortgages presents itself if your house price drops. While this might not be at the front of your mind when you come to buy, it is something you should consider given the current trend of falling house prices. In this scenario, you could end up in what’s called ‘negative equity’, which is when your home is worth less than the amount you’ve borrowed.
So if you buy and then decide you want to move house, you have two options. Either, you’d have to cover the difference between your house price and the mortgage amount to pay off your existing mortgage. Or, you accept that you’re stuck with your current mortgage lender and delay moving until your house price goes back up (and hope that it does!).
Another thing to consider is that you’re putting family’s money at risk. While they probably wouldn’t offer if they weren’t happy to help, you need to be really sure you can afford to keep up the repayments on your mortgage. If you fall behind, the bank can take cash out of the money your relative has tied up, which they may ask you to pay back at a later date.
Borrowing money from friends or family has the potential to put a strain on your relationship, especially if things go wrong. As tempting as it might be to get a place where you can paint the walls and change the curtains, it’s not worth ruining relationships over. So think about whether it’s the right route for you before jumping into anything. The Money Advice Service offers some good advice on the pros and cons of borrowing from loved ones.
What are the alternatives?
Start saving for a deposit
Scraping enough together for a deposit might seem daunting, but it’s definitely doable. If you’re not sure where to start, check out our guide to saving for a deposit here. Or if you’re struggling to curb your spending, you might like these easy tricks to help you save without feeling the pinch. And remember, the bigger your deposit, the less you’ll have to borrow and repay. This usually means that better deals and interest rates will be available to you.
You might have to wait a bit longer to buy your dream home by going down the deposit route, but it’ll be worth it when you get there!
Get help from a government scheme
With house prices rising faster than incomes, it’s no surprise that first-time buyers don’t fancy the challenge of saving up to 40% of their property’s value.
Luckily, the government offer a range of schemes to soften the blow:
- Help to Buy
This equity loan scheme is open to first-time buyers who want to buy a new-build home. You can borrow 20% of the purchase price (or 40% if you live in London) on a property that costs no more than £600,000, and pay it back interest free for the first five years. You must already have a 5% deposit to put down.
- Lifetime ISA
The Lifetime ISA (Individual Savings Accounts), also known as the ‘LISA’, is a way to save to buy your first home, or to save for retirement. If you’re between 18 and 40 years old, you can open the ISA and put up to £4,000 a year in until you’re 50. The government will give you 25% of your savings on top, up to a maximum of £1,000 per year.
You can use your LISA savings to help you buy your first home, as long as:
- the property costs £450,000 or less
- you buy the property at least 12 months after you open the Lifetime ISA
- you use a conveyancer or solicitor to act for you in the purchase - the ISA provider will pay the funds directly to them
- you’re buying with a mortgage
- Shared ownership
An increasingly popular scheme, shared ownership allows you to buy a portion of a property off the landlord, and pay reduced rent on the rest. Your household income must be less than £80,000 (or £90,000 in London) and you can buy between 25% and 75% of the home. So the deposit you’ll need could be much less than if you were buying the entire property. And when you can afford to, you’re free to buy a bigger share your home, up to 100%.
It’s a great way to take your first step onto the property ladder, without saving up for years for a big enough deposit.
- Right to buy
If you’re living in a property you rent from the council, you might be eligible to buy it off them at a discounted rate. You’ll need to have been living there for three years or more (though not consecutively), and the discount will vary based on where you live.
*As with all mortgages, your home could be repossessed if you don’t keep up the repayments.