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Are you a first-time buyer and struggling to save up for a deposit? If so, then a 100% loan-to-value mortgage could be your lifeline. That said, these mortgages don’t work for everyone. This guide will provide an overview of 100% LTV mortgages and why it may be beneficial to use Hello Mortgage as your whole-of-market mortgage broker.
What are No Deposit Mortgages and 100% Loan-to-Value Mortgages?
100% LTV Mortgages or also known as zero deposit mortgages are mortgages that allow the borrower to purchase a property without having a deposit. Also, the lender agrees to lend 100% of the cost of buying a property, with the borrower not having to put down any cash themselves.
What are the benefits of this type of mortgage?
One of the main benefits is that it reduces the time it takes to save up for a deposit. With many first-time buyers in the UK struggling to save up for a deposit, this could be their only option. Additionally, there are other options available such as guarantor mortgages, family offset mortgages, and springboard mortgages which we will look into further in this guide.
A 100% mortgage requires security from a guarantor. This typically means a homeowner with no mortgage allows the lender to take a legal charge over their property for an amount typically the same as the deposit.
If you default on your mortgage you put the guarantor at risk of repossession. This is a very risky way of purchasing a property, but in the right circumstances can work.
Types of 100% LTV Mortgages.
- Guarantor Mortgage
In this type of mortgage, someone else—usually a family member—agrees to act as guarantor if you fail to make repayments on your loan. The guarantor must have sufficient assets or income that can cover your repayments should you default on them. Quite often 100% mortgages are ‘guarantor mortgages’.
- Family Offset Mortgage
In this type of mortgage, members of your immediate family keep some savings in an account linked with your mortgage account and this helps reduce the amount owed by offsetting what’s in those accounts against what is owed on their mortgage balance.
- Springboard Mortgage
This type of mortgage allows buyers who receive help from family members (normally parents) for their deposits but don’t want them tied into any legal obligations regarding how they use that money or how they pay back the loan can take advantage of them instead. It also allows parents to transfer money into an account which is “ring fenced” until the buyer pays back what they owe – effectively giving them access to interest-free loans while they save up enough money for their deposits.
What are the pro’s and con’s of a 100% LTV Mortgage?
Keeping in mind, that a 100% LTV mortgage typically comes with a higher interest rate, so it's important to weigh up the pros and cons before taking the plunge. As with any financial decision, it's always advisable to seek professional advice to ensure you're making the best choice for your individual circumstances.
In the past, first-time buyers had the option of obtaining mortgages with attractive rates and terms. However, due to changes in regulations, these types of mortgages have become increasingly difficult to find. With stricter lending criteria and higher deposits required, many potential buyers may feel discouraged. Before considering a 100% LTV Mortgage, it's crucial to weigh the pros and cons and determine whether it's the right choice for your financial circumstances.
A 100% loan-to-value (LTV) mortgage, which enables borrowers to purchase a home without a deposit, comes with several drawbacks, including:
- Higher interest rates: Lenders may charge higher interest rates on 100% LTV mortgages to compensate for the increased risk they take on by lending the full value of the property.
- Limited choice: Fewer lenders may offer 100% LTV mortgages, which limits borrowers' options and may result in higher fees and charges.
- Negative equity: If the property value declines, borrowers may end up owing more than the property is worth, leading to negative equity. This could make it challenging to refinance or sell the property in the future.
- Stricter lending criteria: Lenders may impose stricter lending criteria, such as requiring a guarantor or a high credit score, to offset the increased risk associated with 100% LTV mortgages.
- Financial risk: Borrowers may face higher financial risk as they have no equity in the property to cushion against any unforeseen circumstances such as job loss, illness, or unexpected expenses.
The main advantage of a 100% loan-to-value (LTV) mortgage is that it enables borrowers to purchase a home without the need to save up for a deposit, which can take years and be a significant financial hurdle for many first-time buyers. Other potential benefits of a 100% LTV mortgage may include:
- Access to the property market: By removing the need for a deposit, a 100% LTV mortgage can help borrowers enter the property market sooner and start building equity in their property.
- Increased borrowing power: With a 100% LTV mortgage, borrowers may be able to borrow more money than they would with a traditional mortgage, as they are not limited by the amount of their deposit.
- Lower upfront costs: Without the need to save for a deposit, borrowers can potentially reduce their upfront costs and instead use their savings for other expenses, such as home renovations or furnishings.
- Flexibility: Some 100% LTV mortgages may offer more flexible repayment terms, such as longer mortgage terms or the ability to make overpayments without penalty, giving borrowers greater control over their finances.
It's important to note that 100% LTV mortgages also come with potential drawbacks, as mentioned in the previous answer, and borrowers should carefully consider their options before deciding on a particular mortgage product.
Are there alternatives to 100% LTV Mortgages?
Purchasing a home is a huge financial commitment, and many people would struggle to secure a 100% mortgage. Luckily, there are other options available, such as government schemes like The Help to Buy Scheme. This scheme allows first-time buyers to get on the property ladder with more manageable upfront costs. Alternatively, a 95% LTV mortgage may be an option. Although it requires a larger deposit, it could result in lower monthly repayments. It's important to explore all options before committing to a mortgage and speaking to an experienced mortgage advisor at Hello Mortgage can help you make the right decision for your individual circumstances.
Update March 2023: Since we wrote this blog the help-to-buy scheme closed to new applications and is no longer an option. Help to buy has since been replaced by Save to buy, read more about this scheme here. may be suitable for you such as shared ownership and the Lifetime Individual Savings Account (LISA).
100% LTV mortgages can be great options for first-time buyers who are struggling to save up enough money for a traditional down payment on their property purchase. However, there are other options available such as guarantor mortgages, family offset mortgages, and springboard mortgages which may be more suited depending on individual circumstances and needs. Speaking with experienced mortgage advisers such as those at Hello Mortgage can help ensure that borrowers get all the FREE ADVICE they need before making any decisions about their potential purchases in order to find suitable solutions at competitive rates too!
Why Use Hello Mortgage As Your Mortgage Broker?
When considering taking out a 100% LTV mortgage, it's important that you speak with an experienced adviser who can explain all your options in detail and ensure that you get the cheapest deal available for your specific situation and needs. At Hello Mortgage we have years of experience when it comes to helping people find suitable 100% LTV mortgages that meet their requirements completely and at competitive rates too! We offer whole-of-market advice with free initial advice meaning there's nothing stopping you from getting all the information you need before deciding whether this is right for you!