What are the pros and cons of 100% mortgages? - 24Housing (2024)

If you’re looking to buy your first home, the idea of a 100% mortgage could be appealing. After all, who wouldn’t want to get their foot on the property ladder without having to save tens of thousands of pounds for a deposit?

However, as with any financial decision, there are pros and cons to consider before deciding if this option is the right choice for you.

Let’s take a closer look.

What are the pros and cons of 100% mortgages? - 24Housing (1)

Understanding 100% mortgages

What is a 100% mortgage?

Also known as no deposit mortgages, this is a type of home loan where the lender finances the entire cost of the property. This means that the borrower doesn’t need to provide a deposit, which is typically a minimum of 5% of the home’s purchase price.

While this may seem like an attractive option for those who don’t have a deposit, it’s important to understand the potential risks and drawbacks. For example, since the borrower hasn’t put any money down, they may have to make higher monthly repayments and may be more likely to owe more on the home than it’s worth, especially if house prices drop.

100% mortgages were available before the 2008 financial crash but disappeared after that as tighter lending rules came in. In May 2023, Skipton Building Society launched a 100% loan to value mortgage called the Track Record Mortgage which first time buyers may be eligible for if they meet certain conditions, including proof of having paid at least 12 months of on time rental payments consecutively in the last 18 months. Applicants must meet affordability criteria and credit checks. This mortgage has a maximum loan size of £600,000 and the maximum loan to income ratio is 4.49. It is currently available to buyers over 21 at a five-year fixed rate of 5.49% with a maximum mortgage term of 35 years. The Skipton Building Society has capped the maximum monthly repayment at the average rental cost that the applicant has paid over the last six months rental cycle to ensure they can afford it.

How 100% mortgages work

As the lender assumes all the risk of the loan since they are providing the entire amount to purchase the home, 100% mortgages often come with higher interest rates and stricter eligibility criteria than traditional mortgages. This is to ensure the lender is protected in case the borrower defaults on the loan.

It’s also important to note that not all building societies and mortgage providers offer 100% mortgages, and those that do may have specific requirements for borrowers. For example, a good credit history will be required, along with certain criteria such as debt-to-income ratio. Ultimately, whether a 100% loan to value mortgage is the right choice for a borrower depends on their individual situation and goals. It’s important to carefully consider other options and speak with a trusted financial advisor before deciding.

What are the pros and cons of 100% mortgages? - 24Housing (2)
What are the pros and cons of 100% mortgages? - 24Housing (3)

Pros of 100% mortgages

No house deposit is required

One of the biggest advantages is that no cash lump sum deposit is required. This can be incredibly beneficial for those who don’t have the funds or time to save money for a deposit. Not having to come up with money upfront can make getting on the housing ladder possible for those who might not have otherwise been able to afford it.

For many people, the hard work of saving for a deposit can take years, and even then, they may not have enough to buy a home in their desired location or with the features they want. A 100% mortgage eliminates this barrier, allowing individuals and families to achieve their dream of homeownership without having to wait years to save for a deposit.

To have the best chance of being accepted for a no deposit mortgage you need a good credit score, a low level of debt, and a regular income. You will need to prove that you can afford the monthly repayments required.

Increased homeownership opportunities

By eliminating the need for a deposit, a 100% mortgage can increase the number of people who are able to buy a home, particularly first-time buyers. This can help to stimulate the housing market and boost the overall economy.

When more people are able to buy homes, it creates a ripple effect in the economy. Homeowners are more likely to invest in their properties, which can lead to increased property prices and more money flowing into the local economy. Additionally, when more people can buy homes, it can lead to increased demand for goods and services, further boosting the economy.

Potential for faster equity growth

Since 100% loan to value mortgages allow buyers to own a home without a deposit, they can start building equity right away. As the home’s value grows, the owner’s equity also grows, potentially making it easier to access future loans or sell the property at a profit.

Equity is an important part of homeownership, as it represents the value of the home that the owner actually owns. With a 100% mortgage, homeowners can start building equity immediately, rather than waiting several years to build up a significant amount of equity. This can provide greater financial security and flexibility in the long run.

Flexibility in financial planning

With a 100% mortgage, borrowers have the flexibility to put money towards other important financial goals, such as retirement contributions, paying off debt, starting a business or emergency funds. When individuals and families are able to achieve homeownership without having to save for a deposit, they have greater flexibility in their overall financial planning which can lead to greater financial stability and freedom in the long run.

What are the pros and cons of 100% mortgages? - 24Housing (4)

Cons of 100% mortgages

While zero deposit mortgages can be an attractive option for those looking to buy a home with no deposit, there are several drawbacks to consider before taking out this type of loan.

Higher interest rates

One of the main drawbacks of zero deposit mortgages is that they often come with higher interest rates than traditional mortgages. This is because these loans carry greater risk for the mortgage lender, as the borrower has no equity stake in the property. Over the life of the loan, this can mean that the borrower ends up paying more in interest than they would with a traditional mortgage.

It’s important to carefully consider the long-term financial implications of taking out a no deposit mortgage, and to compare the interest rates and mortgage deals from different lenders before making a decision.

Increased risk of negative equity

Another potential downside is the increased risk of negative equity. When a home is purchased with a 100% mortgage, the buyer has no equity in the property. This means that if the property’s value decreases, the borrower can quickly go into negative equity, where they owe more on the home than it’s worth.

This can put a homeowner in a precarious position if they need to sell their home unexpectedly, effectively making them unable to move.

It’s important to understand negative equity and carefully consider the housing market and the potential for property values to fluctuate before taking out a no deposit mortgage.

Stricter lending rules

Because 100% mortgages are riskier for lenders, they often come with stricter lending requirements. This can make it harder for some first time buyers to qualify for a 100% mortgage, particularly those with lower credit scores or smaller incomes.

If you’re considering a 100% mortgage, it’s important to carefully review the lender’s eligibility criteria and to work on improving your credit score and financial standing if necessary.

Limited mortgage options

Not all mortgage providers offer no deposit mortgages, which can limit a borrower’s options when it comes to selecting a lender. This can make it more difficult to find a good deal on a 100% mortgage, as there are fewer lenders to choose from.

It’s important to shop around and compare the mortgage deals and competitive rates of different lenders before deciding on a 100% mortgage.

Ultimately, taking out a zero deposit mortgage is a big financial decision that requires careful consideration and research. By weighing the pros and cons and working with a mortgage broker and a reputable lender, you can make an informed decision that’s right for you and your goals.

More expensive

As 100% mortgages present a higher risk to the lender, rates and application fees can be higher.

What are the pros and cons of 100% mortgages? - 24Housing (5)

Alternatives to 100% mortgages

There are several other options that can help you achieve your goal of homeownership. Here are some routes to consider:

Shared Ownership Schemes

These can be a good alternative for those who can’t afford a full down payment or qualify for a standard deposit mortgage. You buy a percentage of the house (between 25-75%) and the rest is owned by the local authority or housing developer. You pay rent on the proportion of the house that you don’t own. It can mean you have a smaller mortgage and a smaller deposit. Shared ownership schemes can be a great way to get a foot on the property ladder, but it’s important to carefully review the terms and conditions of the agreement. Make sure you understand the costs involved, such as rent, maintenance fees, and additional expenses. You’ll also need to consider how to sell your share if you decide to move in the future.

Guarantor mortgages

These require a close family member or friend who owns their own home to be named on the mortgage too: they must agree to meet any mortgage repayments you miss and either use their own home as security or their savings.

Government Mortgage Guarantee Scheme

The government guarantees 95% mortgages for buyers with 5% deposits on houses worth up to £600,000. The scheme was launched in 2021 and has been extended to the end of 2023.

New build developer loans

Here, a developer offers to loan you the deposit on a home they have built.

First time buyer mortgage

You are usually required to come up with a deposit of 5% or more.

Right to buy mortgage

If you have lived in council housing for three years you may be able to buy the house at a discounted price.

Joint mortgages

With a higher joint income, you could borrow more, raising the maximum amount you can buy a home for.

Summing up

While 100% mortgages can be an appealing option for those looking to buy a home without a deposit in the current UK market, they come with their fair share of pros and cons. It’s important for buyers to carefully consider their financial situation and their long-term goals before deciding if this is the right choice for them.

Overall, there are several alternatives to no deposit mortgages that can help you get onto the property ladder. It’s important to do your research and carefully consider your options before making a decision.

What are the pros and cons of 100% mortgages? - 24Housing (2024)

FAQs

What are the pros and cons of 100% mortgages? - 24Housing? ›

As the lender assumes all the risk of the loan since they are providing the entire amount to purchase the home, 100% mortgages often come with higher interest rates and stricter eligibility criteria than traditional mortgages. This is to ensure the lender is protected in case the borrower defaults on the loan.

What are the disadvantages of a 100% mortgage? ›

It's important to note that 100% mortgages come with a higher interest rate. This implies that compared to borrowers with a deposit, those opting for a 100% mortgage will end up paying more. If interest rates rise, the loan could become unaffordable, a risk that's not exclusive to 100% mortgage holders.

Is 100% financing a good idea? ›

Don't Take a 100% Loan if You Can Make a Down Payment

Taking a 100% loan with a piggyback – a first mortgage for 80% of value and a second mortgage for 20% -- would result in a higher overall cost than an 80% loan with a 20% down payment. In part, the higher cost will be in the higher rate on the second mortgage.

What is the disadvantage of a long-term mortgage? ›

However, you'll pay more interest over a long mortgage term and your loan won't be paid down as quickly. You'll also build equity in your home more slowly, as you'll be paying off less mortgage capital each month due to your payments being lower.

How does mortgage 100 work? ›

Mortgage 100 is a 100% home financing program that allows you to pledge eligible securities instead of liquidating assets to make a cash down payment. Parent Power allows you to help a family member finance up to 100% of a primary residence.

How much mortgage is too high? ›

The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (e.g., principal, interest, taxes and insurance).

How much is too expensive for a mortgage? ›

“You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income,” says Reyes. So if you bring home $5,000 per month (before taxes), your monthly mortgage payment should be no more than $1,400.

What is the best length of a mortgage? ›

If, rather than going for a 25-year term, you choose a 30-year mortgage then your monthly payments will be reduced, giving you more cash to spend on things that are important to you. If you've struggled to get enough capital together for a deposit, a longer mortgage term makes owning a house more affordable today.

Is it worth not having a mortgage? ›

Paying off your mortgage and owning your home outright is a major financial goal for most homeowners. Among the numerous benefits of being mortgage-free are the freedom from a major financial obligation and the potential to save thousands of dollars in interest payments.

Which type of mortgage is best for long term? ›

Fixed-rate mortgages

Your monthly payments are more likely to be stable with a fixed-rate loan, so you might prefer this option if you value certainty about your loan costs over the long term. With a fixed-rate loan, your interest rate and monthly principal and interest payment stay the same.

How much should my mortgage be if I make $100000 a year? ›

This commonly used guideline states that you should spend no more than 28 percent of your income on your housing expenses, and no more than 36 percent on your total debt payments. If you're earning $100,000 per year, your average monthly (gross) income is $8,333. So, your mortgage payment should be $2,333 or less.

How to pay $100,000 mortgage in 5 years? ›

With these principles in-mind, here's a look at five strategies that can help you pay down your mortgage in just five years:
  1. Make a substantial down payment. ...
  2. Boost your monthly payments. ...
  3. Pay bi-weekly. ...
  4. Make lump-sum principal payments. ...
  5. Get help paying the mortgage.
Jul 19, 2023

Does FHA allow 100% financing? ›

Are you considering buying a home but need a JUMP START? We now offer 100% FHA financing for eligible homebuyers – meaning you could put ZERO down with an FHA loan.

What are the pros and cons of adding $100 a month to your fixed rate mortgage payment? ›

Extra payments mean you will pay off the loan sooner. By making these extra payments you will ultimately live mortgage free sooner. Cons: the main con associated with adding $100.00 a month to your fixed mortgage payment is the opportunity cost of using that $100.00 in a different way.

How does a 100 year mortgage work? ›

Most US mortgage lenders typically loan to a maximum term of 30 years, though the 100 year term was popular during the 1980s real estate bubble in Japan. A 100-year loan term amortizes so slowly the borrower barely pays more than the interest-only payment each month.

Is it worth paying 100 extra on mortgage? ›

If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.

What is one of the biggest disadvantages in a purchase money mortgage? ›

Cons: Balloon payment requirements: Some purchase-money mortgages require a large payment at the end of the term, which is called a balloon payment. If the buyer can't make this large payment outright, it may be difficult for them to get another loan to cover the cost.

References

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