100% mortgages return to the market. Are they a solution for first-time buyers?
Aspiring homeowners who are struggling to save a deposit could now make use of 100% mortgages as they return to the market. While they could be valuable, there are some drawbacks to weigh up.
Mortgages that don’t require a deposit have been available in the past. However, they’ve been absent from the market for several years as lenders sought to limit the amount of risk they were taking.
Traditionally, first-time buyers have taken out a mortgage to cover 90% of the value of their new home after putting down a 10% deposit. Soaring house prices mean it’s become more difficult to save a 10% deposit without family support. So, the 100% mortgage could provide a vital solution for first-time buyers.
While it may seem like an obvious choice, there are some downsides you should consider first.
1. You will have less choice
If you don’t have a deposit, there will be fewer suitable mortgages for you to choose from. It could make it more difficult to find a lender that’s right for you, or mean the interest rate you’re offered isn’t as competitive.
A mortgage broker can help you search the market for lenders that suit your needs, including those that don’t have a high street presence.
2. Your mortgage repayments could be more
As you’ll be borrowing more through a mortgage when you’re not putting down a deposit, it’s likely your repayments will also be higher.
Make sure you calculate how much your repayments will be and ensure you’re confident you can meet them.
If high repayments could affect your home ownership goals, one thing to consider is extending the mortgage term. This means you’d repay the mortgage over a longer time frame. As the payments are more spread out, your monthly outgoings will be lower. However, a longer mortgage term could mean the total cost of borrowing is higher.
3. The interest rate you pay is likely to be higher
The loan-to-value (LTV) ratio compares how much you owe on your mortgage to the value of your home. Typically, the lower your LTV, the better the rate of interest a lender will offer.
If you choose a no-deposit mortgage, your LTV will be 100%. As a result, the interest rate you pay is likely to be higher than if you put down a deposit. This would affect your repayments and the total cost of borrowing.
However, as you pay off your mortgage or the value of your home increases, your LTV will fall. So, when your first mortgage deal ends, you may be able to secure a more competitive interest rate.
4. You are at greater risk of falling into negative equity
Negative equity is where the value of your home is less than your outstanding mortgage.
If house prices fall, first-time buyers that used a 100% mortgage are more likely to be affected as they hold little to no equity in their property.
After soaring property prices over the last couple of years, some experts are predicting house prices will fall. According to MoneyWeek, Lloyds and Halifax expect house prices to fall by 8% in 2023.
Negative equity can limit your options if you want to move home or remortgage. So, it’s worth thinking about what your short- and medium-term plans are when you’re buying a property.
While no one wants to be in negative equity, historically, house prices have increased over the long term. If you continue to make repayments, you could also build up equity in your home over time.
First-time buyers could still face mortgage affordability challenges
While a 100% mortgage could solve the challenge of saving a deposit, first-time buyers still need to consider affordability.
Lenders will carry out affordability tests to understand how likely you are to default on your mortgage repayments. This will include looking at your household income, as well as other areas.
According to Zoopla, potential buyers who want to purchase a three-bed home will now need a household income of £55,900 a year – £7,350 more than in 2020. Over the same period, the average income has only increased by £4,800.
Of course, house prices vary significantly across the country. It’s worth having a look at the average house price of where you want to buy and carrying out your own affordability calculations before you put in an offer on a property.
As a general rule, you can borrow up to five times your annual income when buying a home. However, other factors, such as outgoings or debt, will affect how much you can borrow.
You could also apply for a mortgage in principle with a lender. This isn’t a guarantee, but it can be a useful indicator of how much you may be able to borrow and what your repayments could be.
Contact us to discuss your mortgage options
As a first-time buyer, mortgages can seem overwhelming. We’re here to help you navigate the process of finding a lender that suits your needs and applying for a mortgage. Please contact us to discuss your mortgage options.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.