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This guide is essential reading for any first time buyer.
100% mortgages allow you to borrow the full amount needed to buy your home, without paying a deposit. However, there are strict criteria you need to meet to get accepted for a 100% mortgage, which will vary from lender to lender.
A guarantor mortgage is a special product that can help those that would otherwise be unable to, to buy or remortgage their house. As with certain 100% LTV mortgages, you will require someone to act as a guarantor. This person will have to put up their property or savings as security (also known as a ‘family offset mortgage’).
To be a guarantor you must:
As the guarantor’s home or savings are put up as collateral against the loan, the biggest risk for a guarantor would be losing their home or savings if the main borrower does not meet their obligations. This is why it’s really important that you weigh up your options before agreeing to become a guarantor for someone, whether it’s a trusted family friend or your beloved son or daughter.
Can first-time buyers get a 100% mortgage? Yes, there are some mortgages available for first-time buyers, which don’t require the borrower to put up a deposit. There aren’t many, but they do exist! There are certain advantages to no-deposit mortgages, most prominently the fact that you’d be able to buy your first home without having to hand over a whole lot of cash upfront. Your savings can then be used towards other costs, such as moving, renovations and furniture. For those without savings, getting a mortgage this way also means that you can stop renting and start using those monthly payments to start paying off your mortgage instead. This can make a big difference when rents are higher than mortgage repayments and house prices are still on the rise.
Some current homeowners may also be able to benefit from a no-deposit mortgage if the value of their home has gone down so much that they now have zero or even negative equity. Without a 100% mortgage, these borrowers would likely be ‘mortgage prisoners’ trapped in a deal with a high interest rate or unable to move home.
We’ve covered the risks of becoming a guarantor, but what about the risks associated with these types of mortgage for the borrower? Well, the greatest risk to the borrower is if property prices fall, and, they now owe more than 100% of its value. This is known as being in negative equity.
This is a problem, but only if you are considering remortgaging or moving home (assuming you can keep up the regular monthly repayments). As most lenders will be reluctant to let anyone with negative equity switch to a new deal, you will likely end up on your lender’s standard variable rate. One way to get out of this is to overpay your mortgage. However, not everyone can afford to do this.
It should be noted that if you fail to keep up with your mortgage repayments then your home could be repossessed, and if you have someone acting as guarantor then their savings or home could also be used to help pay off your debt.
If you’re considering taking out a mortgage without using a deposit, you may not have much in the way of savings, so it’s important to understand all the costs associated with buying a home, making sure you can meet them. It is impossible to list all the costs you may have to meet as these are likely to vary, but there are some general things to keep in mind.
Given their status as mortgages for those who don’t have any other option, it’s not surprising to find that 100% mortgage products tend to come with higher interest rates and fees than other mortgage types. Those with a lack of savings should also remember that there will still be other costs to pay upfront, such as stamp duty and conveyancing fees for those moving. There may also be early repayment charges to pay for those remortgaging.
While it’s important to compare the few 100% mortgages available to make sure you are getting the best possible deal, it may be a good idea to also look at alternatives.
If you are a homeowner who’s lost some of the value in their home, you may be able to remortgage to a higher-LTV mortgage that is still below 100%. Likewise, first-time buyers without someone to act as their guarantor will have to stump up a 5% deposit but will also be able to get much better deals as a result.
For those with family members that are willing to help their loved ones get on the property ladder in any way possible, there’s another option. That savings pot they are happy to put up as collateral may also be used as a gifted deposit to help get a more competitive deal. Some may even use equity release to help their children get together a decent deposit.
There are a few things to watch out for when gifting a deposit, however. You will need to follow the correct procedure and be able to show that the help is a gift, not a loan. This will likely require the help of a solicitor, so don’t wait too long to ask for advice and arrange things, or your property purchase might get delayed or even entirely derailed.
For those without generous benefactors, there’s always the Help to Buy or Lifetime ISA schemes to consider. These can allow you to save up for that deposit a bit faster thanks to a Government bonus of 25%. They do come with restrictions, though, so remember to read up on them before committing.
If you're still not sure what kind of mortgage is right for you, you could consider using a mortgage broker. Not only can they provide valuable advice, but they may also have access to 100% LTV mortgage deals that are not available directly on the Moneyfacts charts.