Can you still get 100% mortgages for first time buyers?
Hi, I am fed up of renting and want to get on the property ladder and buy a house. The problem is that though I want a mortgage I have no deposit saved at all. Is it possible to get a 100% mortgage with no deposit or is that a thing of the past? I recently read a news article that suggested some mortgage lenders are offering no deposit mortgages but i could be wrong. Any help or advice you could give me would be greatly appreciated as first time buyer mortgages seem to be a bit of a minefield.
In these days of rising house prices, and rising rents it’s getting harder and harder for first time buyers to get onto the housing ladder, as they struggle to raise the necessary deposit they need.
In many cases they can easily afford the mortgage repayments, which are similar to their current rent. But like you they just don’t have sufficient spare income to build the deposit before house values increase further, requiring an even larger deposit!
The Help to Buy scheme is not ideal
The government Help to Buy (HTB) schemes have been of some help but these are not necessarily the ideal solution for the individual borrower. Some lenders who operate these schemes have stricter criteria so buyers may not meet the lender's criteria. Lenders in the Help to Buy market have to pay for the privilege, which leads to higher interest rates for the buyer, typically around 4% for a 95% Help to Buy Mortgage guarantee scheme.
Unfortunately higher interest rates lead to increased affordability challenges, making it harder to qualify for the mortgage. This doesn’t really make sense for a scheme designed to help first time buyers!
95% mortgages for first time buyers
Fortunately several lenders also offer 95 percent mortgages outside of the Help to Buy rules, and these at least offer a reasonable alternative route. Rates in the market vary, but can be 0.5% or more lower than Help to Buy rates. Yet as the name suggests you only need a 5% deposit. When I say 95% mortgage I am of course referring to a mortgage equivalent to 95% of the value of the property. This is known as the loan to value percentage or LTV.
Gifted mortgage deposits
However, the need for a deposit still causes a problem. That’s where so many people resort to the “Bank of Mum & Dad” to help. A gifted deposit can be the lifeline that saves the day. Yet most lenders will not accept a gifted deposit if they know it has to be repaid, as that’s an extra strain on affordability. But what happens if Mum & Dad need it repaid because it’s there to support them in the future? Or worse still if they can’t actually afford to give it to you in the first place!
A private agreement to repay the loaned deposit, that the lender is not aware of, is obviously one solution. Sometimes the buyers will not be able to repay the loan until they can re-mortgage, maybe several years in the future, assuming they meet the lending criteria for the bigger mortgage of course!
The 100% mortgage is BACK!
It’s no surprise then that some lenders are now looking at new and unusual ways to address these issues. One of the more unusual is the “Springboard” mortgage from Barclays, which offers fixed rates under 3% at the time of writing, which is more in line with an 80% loan to value (LTV). This compares to their Help to Buy rates of nearly 4%.
Of course you still have to prove the mortgage repayments are affordable. To access these Low rates the First Time buyer need only provide a deposit of 5%, and can even offer NO deposit. Yes, zero deposit, nada, nothing at all.
This is where the “Bank of Mum & Dad” comes into play (or other acceptable third parties). They are required to place funds equivalent to 20% of the property price into a 3 year no-access savings account with Barclays. After three years the funds are released with added interest at a rate of 1.5% above the Bank of England Base rate.
At that point the buyer can then re-mortgage as the combination of paying off some of the debt over the three years, and the expected rise in their property value, will mean they only need a 90% mortgage or even lower – yet more importantly no more help from mum and dad.
In the past 100% mortgages had a bad press as buyers were locked into deals they couldn’t afford, partly because of the high rates being charged by the lenders for the additional risk of lending 100% LTV.
Given today's low interest rates on savings the aforementioned idea is not a bad deal for Mum & Dad, as long as the mortgage is paid on time and is up to date. It’s a good idea, but it has one major flaw. With a typical house costing £170,000 it does mean the parents have to have about £34,000 available to lock away, so it won’t be ideal for everyone.
Fortunately some lenders are offering an alternative that works in a similar fashion, but instead of requiring hard cash they will use the equity in Mum & Dad’s house. They do this by taking a legal charge on the property, that is released at a later date. This will result in additional cost as there will be extra legal work, and the parents property may need to be valued.
Typically the charge on the parents' property will be for a sum equivalent to 25% to 35% of the mortgage being raised by the First Time buyers. This ensures that should the FTB fall behind on their mortgage all costs can be recovered.
In order to attach a 35% charge the parent's property they should have at least 40% equity over their own mortgage (if they have one). The advantage of such strong security is that rates for the first time buyer can be set low, close to 3% for a 100% mortgage. Product fees are low too, or non-existent and there is at least one scheme where there are NO early repayment charges to pay at any time. This will allow the FTB to re-mortgage as soon as they have equity in their property.
Overall schemes like this have a place in the market, and a 100% mortgage will help a lot of people onto the property ladder. But I urge caution. Make sure you are dealing with an experienced adviser who fully understands the scheme chosen. This should NOT cost you any extra in adviser fees if they are a reasonable adviser. Ask to see their standard terms. You should also involve Mum & Dad in all discussions and they will be encouraged to seek legal advice.
You can ask Darren directly, online, if you would be able to get a 100% mortgage based on your circumstances. Most people can.Ask Darren
Financial Planning Designer
If you would like to contact Darren for help with trying to get a mortgage then you can contact him.