In May 2023 Skipton building society announced plans to launch a 100% mortgage. In doing so it became the first lender to launch a true 100% mortgage since the 2008 financial crisis.
In this article we look at the pros and cons of 100% mortgage, who it’s aimed at, and whether you should choose one. If you’re curious how much a 100% mortgage might cost you, and what your repayments would be, see our mortgage calculator tool.
What is a 100% mortgage?
In the simplest terms, a 100% mortgage is a mortgage where you borrow the amount of the home or property that are purchasing.
Traditionally, mortgages require the buyer to some of their own money into purchasing a property in the form of a deposit. Usually this would be between 5-25%. A 100% mortgage removes this burden, and enables those who are finding it difficult to raise a deposit, to still buy their own home.
Before 2008 these types of mortgages were more commonplace, in fact, it wasn’t unheard of to even borrow more than the property was worth. Northern Rock famously offered 125% mortgages. Of course, we all know how that ended, and as a result of the financial turmoil it caused, new regulations were introduced.
Who is a 100% mortgage for?
Typically, such mortgages are aimed at renters, who does the cost of rent especially with recent rises, find it difficult to for a deposit.
Recent data from Halifax found that the average deposit by those buying their first home in 2022 was over £62,000. An increase of 8% on 2021s figures.
If you’re renting, especially if renting alone, then saving that kind of money might seem impossible. A 100% mortgage helps you over that initial financial barrier.
What are the risks of a 100% mortgage?
By far the biggest is falling into negative equity. This means owning more to your mortgage lender than your property is actually worth.
For example, if using a 100% mortgage to buy a property worth £150,000 (let’s say a 1 bed flat on Surrey Street, in Norwich), and it’s value later falls to £140,000, you still owe your lender £150,000 minus anything you’ve paid off already.
This isn’t a problem in itself, provided you can keep up with the mortgage payments after your fixed term period ends, and don’t want to sell or re-mortgage the property.
If you wanted to sell, because the property is now only worth £140,000. You’d have a £10,000 shortfall (again minus anything you’ve already repaid) that you’d need to pay the bank before they’d allow the deal to go through. If you couldn’t pay that, you simply wouldn’t be able to move.
The other main issue with negative equity is when it comes to re-mortgaging. Let’s say after 3 years, the fixed rate period on your mortgage ends, and lender now increases the rate from 4% to 6% variable.
Typically, you’d shop around and look for a cheaper mortgage, but due to having little or no equity into the property yourself, other lenders are likely to decline to offer you a mortgage, leaving you stuck and possibly unable to afford the increase.
While negative equity is a real concern, as you pay off more of your mortgage over the years, it becomes less significant.
For example, if you borrowed £150,000 on a 25 year mortgage with a fixed rate of 5% for five years. By the end of that five year period, you have paid off roughly £17,000 of the principal sum and have roughly 10% equity.
Should I get a 100% mortgage?
The number of providers offering 100% mortgages is limited. In fact Skipton Building Society is the only lender offering a true 100% mortgage at the moment. Other providers all require a guarantee of some sort. That might change in the future, but currently the options are limited.
The interest rate on the 100% mortgage is fixed for 5 years at 5.49% but there are no setup fees. If, however you save enough for even a 5% deposit, you could lower your mortgage rate to less than 4.6% fixed for 5 years, which could save you £1,700 in the first year alone.
On a property valued at £200,000 a 5% deposit would be £10,000, but on top of that you have various other fees to contend with, such as solicitors, surveyors fees, and valuation fees. On their own these can run into a few thousand pounds.
Fortunately, there is help. If you’re under 40 years old, you may be able to open a LISA, which is a special type of ISA, aimed to people saving to buy their first home, or saving for retirement.
We have a complete guide to LISAs to won’t go into it fully here, but essentially, you can save up to £4,000 a year and the government will top this up by 25%. You can then put this money towards buying your first home.
What’s required to get a 100% mortgage?
Just as with a regular mortgage you’ll need to pass a strict credit check and meet affordability criteria.
Additionally, because a 100% mortgage is seen as more of a risk by the banks, there are few hoops more you have to jump through.
In the case of Skipton’s 100% mortgage, your projected monthly mortgage payment must be equal or smaller than your current rent. So, if you were renting a 1 bed flat in Birmingham City centre for £895 a month for more than six months, you’d have a maximum mortgage payment of £895. That would get a mortgage of around £145,000 at 5.49% which is what the new Skipton offer originally launched at.
You’ll also need be able to prove you’ve been renting for 12 consecutive months out of 18, and paid household bills, and council tax.
Is a 100% mortgage worth it?
This is a tough one to answer as it’s going to be very specific to your personal circumstances. A 100% mortgage will allow those who would otherwise struggle to save for a deposit, to get onto the property ladder, but not without risks mainly negative equity.
That being said, the risks decrease the further into the contract you are, and like most fixed-rate mortgages Skipton’s allows you to over pay up to 10% a year, but there are early exit fees for leaving before the 5 year term is up.
It’s something that requires careful consideration, and we’d recommend approaching with caution.