100% Mortgages: The First Homes Scheme

Category: Mortgages

With the average annual rent in the UK reaching £11,075 and the average salary for people aged 22-29 at £26,500, renting makes up a shocking 42% of first-time buyers’ income. This is excluding bills and the cost of living, too. The average asking price for first-time buyers hit a record high of £225,000 back in April, making saving for a 10% £22,500 deposit more difficult than ever.

Due to the majority of first-time buyers being unable to save enough for a deposit due to high rents, 100% mortgages are making a comeback to help them break this rental cycle.

Author: Becky Mundie

Digital Marketing Executive

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Buying a House Without a Deposit

It is exactly how it sounds. A 100% mortgage is a loan for the whole cost of the property, with no deposit required. Often 100% mortgages are expensive in the long run, due to high-interest rates, but offer a quicker solution for first-time buyers to escape the renting cycle. Once the mortgage is secured, the monthly repayments consist of the total borrowed and the interest.

Before the financial crash of 2008, ‘no-deposit mortgages’ were the norm. Falling into negative equity was rare due to the consistent rise of house prices. Credit score still matters for 100% mortgages to show lenders proof of the buyer’s spending habits.

Following the pandemic in 2021, a few banks and building societies such as Nationwide, NatWest, and Santander introduced 95% mortgages. This was encouraged by the government’s new mortgage guarantee programme for high loan-to-value (LTV) lending, to help first-time buyers get onto the post-pandemic property ladder. With the announcement of the second Help to Buy scheme in the works, too, hope is certainly on the rise for first-time buyers.

Due to the inflation of energy bills and rents increasing by 11% in the last year, 35% of renters are struggling to save for a deposit and are, in most cases, spending more on rent than they would be on mortgage repayments. Because of this, Skipton Building Society has introduced its 100% mortgage.

Skipton Building Society’s Track Record Mortgage is specifically a first homes scheme. Designed for first-time buyers aged 21 and above, they can borrow 95-100% for their mortgage. The Skipton track mortgage is a 5-year fixed-rate mortgage over a maximum 35-year term, charging an annual 5.46% interest. This compares to 5% interest in average 5-year fixed mortgages and the typical 5.33% rate on 95% LTVs. Even at the 5.33% rate, buyers often opt for a lower rate.

However, Skipton offers a first in over a decade. By not asking for any additional fees or repayments higher than the average the buyer spent on rent in the last six months, Skipton truly puts the buyer first.

Types of 100% Mortgages

Due to the house buyer not investing any of their own money into the property, lenders see 100% mortgages as a risk. This makes providers few and far between, with even slimmer no-deposit mortgages on offer. Lenders often have specific criteria for buyers to meet. Most only offer guarantor-style mortgages.

Guarantor Mortgages

A guarantor is often a family member. They act as a guarantee that the house buyer will make their repayments and step in to pay if they cannot. Many providers require the guarantor to be a homeowner, meaning that their home may be at risk if the house buyer they are a guarantor for faults on their repayments.

Some guarantor mortgages use savings rather than property as security. This is where the guarantor offers their savings to pay the mortgage if the house buyer cannot. Even with a willing guarantor some lenders see risk in 100% mortgages, so can still ask for a deposit.

Family Deposit Mortgages

A family deposit mortgage is like a guarantor mortgage, except that the family’s savings are put into an account linked to the house buyer’s mortgage. The money is used as security in case the repayments cannot be paid and an offset to make repayments more manageable.

The lender often pays interest on the savings if it remains in the account for the first five years. Once a certain amount of time has passed or enough of the mortgage has been repaid, the guarantor gets their money back – often with interest.

Family offset mortgages work similarly, though the family member does not earn interest. Instead, the money in the account is deducted from what is owed when interest is calculated. This means much more affordable monthly repayments.

Such family mortgages, like most 100% mortgages, are rare. However, some banks and building societies are following in Skipton’s footsteps. Barclays offers a 100% Family Springboard Mortgage, allowing a family member to put 10% of the purchase price of the property into a cash savings account, which they cannot access for five years. The same is offered by Loughborough Building Society’s Family Deposit Mortgage. A family member chooses to deposit a lump sum into a designated account, agree to accept legal charge over their own home, or a mix of the two.

Pros and Cons of 100% Mortgages

Advantages of 100% Mortgages

There are no upfront costs.
The buyer owns a home much quicker than they would if saving for a deposit.
Mortgage repayments can be cheaper than renting.
The homeowner can build up equity and re-mortgage the property for a better deal once their introductory mortgage ends.

Disadvantages of 100% Mortgages

There are fewer lenders to choose from.
There is potential to slip into negative equity if property prices fall.
Buyers will likely need a guarantor, which puts that person (usually a family member) at financial risk.
Higher interest rates and additional fees are likely due to being seen as a higher risk.

100% Buy-to-Let Mortgages

While the Skipton track mortgage is for first-time buyers, it does not include those looking for their first buy-to-let property. Buy-to-let properties are only available as at least 20% or 25% deposit mortgages.

With this in mind, however, first-time buyers may decide to invest in their first property. This way, the buyer can earn significant returns for their buy-to-let property while saving for their buy-to-live property. While waiting for their dream home to hit the market, they can secure additional capital that can be added to the cash deposit.

Download the FREE CityRise Buy-to-Let Mortgage Guide to learn more.

CityRise Verdict

The idea of 100% mortgages can appear tempting, especially to first-time buyers. Buyers can escape the rental cycle and become a homeowner much quicker without the need to save for a deposit. However, this first homes scheme comes with risks for buyers and lenders.

Juggling the different mortgage rates to find the best deal is difficult enough without trying to find specific no-deposit lenders. With fluctuating property prices, homeowners who take out a no-deposit mortgage may not be able to resell the property and banks could be stuck with properties that are worth less than what the loan was for.

While tempting, it is important to compare deals and calculate mortgage repayments that are within your budget. For first-time buyers, it may be beneficial to first invest in buy-to-let properties. This way, they can earn passive income while saving for their dream home.

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