The 100% mortgage is back
After disappearing from the market following the house price slump in 2009, 100% mortgages are back. Following on from some small lenders starting to offer 100% mortgages in their local areas, Aldermore is now offering a deposit-free mortgage across England and Wales.
The 'Family Guarantee Mortgage' is designed for borrowers who don't have large cash deposits. Instead, parents, step-parents or grandparents will have to provide a guarantee secured against their own home for the first 25% of the loan.
A chance of recovery
"Many first-time buyers have become disenfranchised from the housing market because of the large deposit demanded by most lenders. We believe this is the single biggest issue facing first-time buyers and it needs to be addressed head on if the UK's housing market is to have a chance of recovery," says Charles Haresnape, managing director of residential mortgages at Aldermore.
The guarantee put up by relatives can be repaid at any time or be released if the loan to value (LTV) on the property falls below 75%. The guarantee period is limited to 10 years, at which point it will expire unless the LTV remains above 75%.
The loan is available on a repayment basis only – so you can't just pay off the interest on the loan – and the maximum loan size is £250,000. Borrowers must be at least 25 and have a spotless credit record.
The concern here is that, as with all 100% mortgages, house prices only have to drop slightly for you to end up in negative equity. More worryingly, if you fall behind on your mortgage payments your parents could be at risk of losing their home too. All-in-all, it's a very risky way to buy a home.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.