After disappearing from the market following the 2008 financial crash, 100% mortgages are now back with lender Skipton offering a no-deposit product. We explain how they work for first-time buyers and if you can get one.

When buying your first home, you’ll normally need to pay a deposit of around 10% of its value. A bank or building society will then loan you the rest.

Until the financial crash in 2008, buyers could borrow 100% of the value of a property, and in some cases more. This made it easier to get on the housing ladder. That’s because prospective buyers didn’t need to spend years saving for a deposit.

But after the crash, banks tightened their lending criteria. They began asking for a deposit as standard when issuing new mortgages. The minimum deposit amount that lenders accept currently ranges between 5% and 10%.

Property website Rightmove found that the average asking price for a home for a first-time buyer hit a record high of £225,000 in April. This means buyers need to save £22,500 on average to put down a 10% deposit and apply for a mortgage.

With inflation near a record high and energy bills soaring in recent years, it has become harder for those aiming to buy property to save for a deposit.

Online property portal Zoopla also found that average rents jumped 11% in the year to January. This means tenants are spending more on rent that could be going towards saving for a future home.

How does the 100% mortgage work?

One lender, Skipton Building Society, has recently launched a 100% mortgage product, called a ‘Track Record Mortgage’. Applicants can borrow from 95% to 100% of a property’s value, meaning they will not need to provide a deposit of any kind if they so choose.

Skipton’s Track Record mortgage product will only be available to first-time buyers aged 21 or over. It will take the form of a five-year fixed-rate mortgage charging annual interest of 5.49%, with no fees to pay. The average five-year fixed mortgage is currently around 5% according to Moneyfacts.

Applicants will face stringent affordability checks and credit scoring to ensure they will be able to make mortgage repayments. Those applying will also need to provide evidence of at least one year’s worth of timely rental payments.

The monthly minimum mortgage repayment those approved will make will not be more than the average of the last six months of rent that they have paid. For example, an applicant that has paid an average of £800 each month in rent over the last six months will have a maximum monthly mortgage repayment of £800.

It is possible that other lenders could follow suit in the coming months and years.

Is a 100% mortgage right for me?

Skipton’s new offering is specifically targeting those who have struggled to get the money together for a house deposit, but have rented for several years.

“We’re developing a mortgage product to enable people trapped in rental cycles to access the property ladder and make a home,” said the lender’s chief executive, Stuart Haire.

“This includes people who have a decent history of making rental payments and can evidence affordability of a mortgage. Their only barrier to becoming a homeowner is not being able to save enough for a deposit.”

How much can I borrow with a 100% mortgage?

To ensure applicants can afford the mortgage, Skipton is capping the maximum monthly repayment at their average monthly rental costs over the last six months. This determines the overall amount you can borrow.

Below are the various amounts you can borrow from Skipton Building Society based on different monthly rental payments (assumes loan of 100% of the property’s value with a mortgage term of 30 years):

Average monthly rent over the last six months – Maximum amount you can borrow if approved for Skipton’s 100% mortgage
£300 – £52,900
£600 – £105,800
£800 – £141,000
£1,000 – £176,300
£1,250 – £220,375
£1,500 – £264,450
£2,000 – £352,600

Are there any other options out there already?

As well as the new Skipton product, there are some options out there already, but most require a deposit from a friend or relative, which works as a sort of security for the bank.

Barclays offers a 100% family springboard mortgage which requires the applicant’s family member to put 10% of the purchase price into a cash savings account, which they cannot access for five years.

Loughborough Building Society allows family members to put a cash lump sum into a designated account or agree to accept a legal charge over their own home, or a mix of the two, via its family deposit mortgage.

In 2021, the government also launched a new mortgage guarantee scheme – but you need a deposit to access it.

Through the scheme, the government ‘guarantees’ 95% mortgages for buyers with 5% deposits on homes of up to £600,000.

The initiative was launched in April 2021 in an attempt to encourage banks to start offering 95% mortgages again, after nearly every single one was withdrawn during the pandemic.

Under the terms of the mortgage guarantee scheme, the government guarantees the portion of the mortgage over 80% (so, with a 95% mortgage, the remaining 15%). This might sound complicated, but in practice it just means the government will partially compensate the lender if a homeowner defaults on their repayments.

What are the risks of a 100% mortgage?

One possible downside of a 100% mortgage is that it can increase the risk of negative equity.

Negative equity can arise when the value of a property falls, and the value of the loan is higher than that of the property. If a buyer hasn’t paid a deposit, the amount of equity they have is even lower.

Pre-financial crash, 100% mortgages were common because house prices were rising each year. But figures show us house prices are now beginning to fall, raising the risk of negative equity.

This could create problems for both buyers and lenders. It means homeowners won’t be able to sell and banks will be stuck with properties that are worth less than the loan – raising the threat of another potential crash.

To find out more get in touch today on 0113 265 3759 or by using the contact form below to speak to one of our experts.