A 100% mortgage (also known as a zero-deposit mortgage), is a mortgage that covers the total cost of a property. This therefore stops any need of saving up for a cash deposit. These types of mortgages are usually only approved for buyers if they have a strong and consistent rental history or if they have a family member or close friend willing to stand as a guarantor to offset any risk to the lender.
How Does It Work?
With this type of mortgage being a higher risk of negative equity, the lender will therefore require evidence of your financial track record or a guarantor’s savings backed in an account. For track record evidence, the lender will require proof that you have consistently paid rent for at least 12 months without missing a payment. If a guarantor is used, then this is a family member or close friend that is willing to put their own savings into an account or have their own property put up as security against the mortgage for 3-5 years. Once one of these has been approved by the lender, the rest of the mortgage process is the same, minus the taking of a deposit, as this step is done instead.
What Are The Positives and Negatives Of A 100 Mortgage?
The positive points of a 100 mortgage is that you are able to get onto the property ladder a lot sooner as there is no need to spend time saving up for a deposit. If you use a guarantor or go through the family-backed route, the money put up for security against the mortgage is returned with added interest once the agreed time term is completed.
However, the negative points of a 100 mortgage is that they are strictly under-written, and they come along with rigorous stress-testing and high affordability. The interest rates of these mortgages are also a lot higher than low deposit mortgage interest rates, (they are usually 90%-95%), and this is due to them being a much higher risk to lenders approving them. And lastly, if property value drops, then you are more at risk to negative equity due to having no built up equity to fall back on.
Costs To Remember
As with normal deposit mortgage processes, there is still also costs to remember about when applying for a 100 mortgage, which are:
- Stamp Duty (This may not apply as doesn’t always apply to 100 mortgages) – This is the tax rates and depend upon if you are a first time buyer or if you are purchasing a property which costs above average thresholds.
- Legal Fees – The usual solicitors and conveyancers are still required for handling legal documents and tasks throughout the process.
- Survey and Valuation Fees – As with buying any other mortgage, the property needs to be assessed and valued for approval against lending terms which is an up front cost.
- Mortgage Arrangement Fees – The lender will charge for arranging the documents and terms of the mortgage and having everything in place.
These costs are all up front costs to be paid for the process of getting a 100 mortgage to run smoothly. So you may not need a deposit saved up, but you will need money saved up and put aside for the fees of the process to be completed.
