As the name might suggest, a 100% mortgage will allow you to borrow the full value of a house, meaning you can make the purchase without requiring a deposit.
Before the economic collapse, 100% mortgages were easy to come by, although not without increased risk attached for borrowers. Now they're much more difficult to come by, with only one lender in the UK currently having a 100% mortgage product on offer.
As it stands there is one 100% mortgage deal on the market; 'The Family Guarantee Mortgage', launched by Aldermore Bank in September 2011.
With this mortgage:
- You can borrow 100% of the value of a property
- A family member(s) must be willing to guarantee 25% of the value of the property, in the form of collateral, such as a home or other asset. i.e. if the property you want to buy is £200,000, your guarantor need to be willing to be liable for £50,000 (25%)
- If you default on the payments the guarantors home may be repossessed in order for the lender to reclaim any shortfall
- 2 & 3 Year fixed rate deals are available at around 6%
- The loan is available on a repayment basis only.
The biggest risk to be aware of is that you run the risk of running into negative equity (owing the bank more than the property is worth), if the house prices fall. This almost certainly true if you're buying a new build home which depreciates considerably as soon as it is lived in.
When 100% mortgages were common, many people opted for them to get on the property ladder. This in turn created a pricing bubble which rapidly increased the cost of house prices across the UK. When the economy crashed, the pricing bubble then popped, leaving many homeowners still struggling to clear off a loan which is much greater than their property is currently worth.
A Better Alternative
If you can wait long enough to get some savings together, a 95% mortgage on the government's help to buy scheme will be a better bet. At least this way you'll instantly have 5% of equity in the property, which will safeguard you a little if the prices do fall a bit. It'll also help you to slowly build up more equity in the property which will in turn see you qualify for mortgage deals with better interest rates.
For more information see our guide: 'First Time Buyers – 95% Mortgages Explained'