How to buy a home with a 100% mortgage
If you’re a first-time buyer in the UK and you don’t have enough savings for a deposit, you might be wondering if there’s a way to buy a home without putting any money down. The answer is yes, but it’s important to understand the process and the risks involved before you make a decision.
What is a 100% mortgage?
A 100% mortgage is a loan that allows you to borrow the entire value of the home you want to buy. This means that you don’t need to put any money down as a deposit. Typically, most mortgages require at least a 5% deposit, but with a 100% mortgage, you can avoid paying any money upfront to secure your dream home.
How does a 100% mortgage work?
In the UK, 100% mortgages are often offered as guarantor mortgages. This means that you’ll need to find a trusted family member or friend who is willing to take responsibility for the loan if you encounter difficulties in keeping up with the repayments. Similar to a typical mortgage, repayments for a 100% mortgage are made monthly over an agreed term. However, it’s important to note that due to the higher risk involved for the lender, you may be charged a higher interest rate. This can result in more expensive monthly repayments.
Changes in 100% mortgages
100% mortgages have become less common in recent years, particularly following the financial crash of 2008. Lenders have become more cautious, and affordability criteria have become stricter to ensure borrowers can manage their repayments. Recently, some lenders have started to re-introduce 100% mortgages, particularly aimed at first-time buyers who can prove years’ worth of rental payments, and who are struggling to save a deposit whilst renting.
Advantages of a 100% mortgage
The primary advantage of a 100% mortgage is that it allows you to purchase a home without having to save for a deposit. This can be particularly helpful if you have a low income or if you live in an area with high property prices. Moreover, a 100% mortgage enables you to enter the property market sooner than if you were waiting to accumulate enough savings for a deposit.
Disadvantages of a 100% mortgage
It’s crucial to consider the potential drawbacks associated with a 100% mortgage. One significant disadvantage is the higher risk involved. By borrowing the full value of the property, you may find yourself in a situation of negative equity if house prices decline or if you need to sell your home. This could make it challenging to pay off your debt.
Additionally, a 100% mortgage typically comes with a higher interest rate, leading to increased monthly repayments. This can make it harder to afford your mortgage payments over the long term.
What to do if you can't get a 100% mortgage
If you find that a 100% mortgage is not feasible for you or if you believe it’s not the right option, there are alternative paths you can explore:
Saving money
If you are on your lender’s standard variable rate (SVR), which is the rate you revert to after your initial deal ends, you might be paying more interest than you need to. By switching to a lower-rate deal, you could potentially save on your mortgage payments.
Save for a bigger deposit
Consider cutting down on your expenses or finding ways to boost your income to save up for a larger deposit. The more you can save, the more favourable mortgage options you may have.
Explore cheaper properties or shared ownership
Look for more affordable properties within your budget or consider shared ownership schemes
Government schemes
Investigate government schemes like Lifetime ISA. Which tops up on savings through government bonuses.
Seek support from family or friends
Reach out to your loved ones who might be in a position to gift you some money or lend it to you at a lower interest rate.
Improve your credit score
Take steps to enhance your creditworthiness by paying off existing debts, managing your finances responsibly, and maintaining a good credit history. A higher credit score can improve your chances of securing a mortgage with favourable terms.
It’s advisable to speak to one of our expert mortgage advisors, they can help you find the right mortgage product for your circumstances.
