Mortgage deposit explained 100% mortgages
With a 100% mortgage you can borrow the full value of the property you want to buy, without a deposit. We explain how 100% mortgages work and look at the risks they could present.
The obvious benefit of a 100% mortgage is that you can buy a property without needing to save up beforehand. If you're a first-time buyer and are struggling to save up for a deposit, this type of deal may seem pretty appealing.
However, 100% mortgages are very rare in the current market - and they're risky, too.
- Want some help deciding if a 100% mortgage could be right for you? Which? Mortgage Advisers can help first-time buyers get on the property ladder with impartial, jargon-free advice. Call our expert, friendly team for a free initial consultation on 0808 252 7987
100% mortgages: guarantor mortgages
The are currently two types of 100% mortgage available:
Traditional guarantor mortgages
With this type of mortgage, a family member agrees to act as a guarantor on your mortgage.
This means that if you can't meet your repayments and your home gets repossessed, your mortgage lender will expect your guarantor to cover the cost of any losses.
For example if you owed your lender £150,000 but your lender was only able to recover £125,000 by repossessing your property and selling it, your guarantor would be liable for £25,000.
If your guarantor couldn't find the money, their home could be repossessed as well.
However, their liability will usually be capped at 25-35% of the value of your mortgage, so this is the most they would be responsible for repaying if you were unable to meet your repayments.
Guarantor mortgages are currently available from Aldermore, Bath Building Society and Tipton and Coseley Building Society.
Pros of guarantor mortgages
- Assuming you meet all your repayments, it won't cost your family member anything to be a guarantor
- Neither you nor your family member need to find a deposit
Cons of guarantor mortgages
- In the worst case scenario, your family member could lose their home if you couldn't keep up with your mortgage repayments
Family deposit mortgages
Here, your family member deposits cash - typically between 10% and 20% of the property's value - in a special savings account, and the money is then held as security against the mortgage. The cash is held for a fixed period of time after which, assuming you have met all your repayments, it will be given back.
This type of mortgage is currently offered by Barclays and Vernon Building Society.
Pros of family deposit mortgages
- Your family member will earn interest on their money while it is being held in the savings account
- They can help you onto the property ladder without putting their own home at risk
- Their liability is limited to the money held in the savings account
Cons of family deposit mortgages
- The family member must have cash that they can afford to use as a deposit
- While the money is in the savings account your family member can't access it or use it for anything else
More on this: find out more about guarantor and family deposit mortgages plus other options with our guide to guarantor mortgages
The biggest risk of a 100% mortgage is that you can very easily fall into negative equity, which means owing more to your mortgage lender than your property is worth.
For example, if you used a 100% mortgage to buy a flat worth £200,000 but its value then dropped to £185,000, you'd still need to pay £200,000 back to your mortgage lender. This would mean that if you sold it for £185,000 you'd need to find an extra £15,000 from somewhere else.
This could cause you problems if you ever wanted to move house or remortgage. You would most likely be trapped in your current mortgage deal unless you could find more money from somewhere else.
As you pay off more of your mortgage and own more of the equity, this will become less of a problem - but in the first few years of your mortgage the risk is significant.
If you don't have a family member who is able to be a guarantor, you'll need to get a more traditional mortgage where you put down a deposit of at least 5%.
There are a wide range of 95% mortgages available from lenders, although the interest rates on some of them can be pretty high. We'd recommend taking professional mortgage advice from a whole-of-market broker such as Which? Mortgage Advisers to ensure you end up with the best deal for your personal situation.
Find out more: 95% mortgages - our guide to how mortgages with a small deposit work
Your home may be repossessed if you do not keep up repayments on your mortgage.
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